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

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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 September 30, 2021, and September 30, 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. AQN: Arbitria Quum Notitia, LLC (AQN Strategies) ARRC: Alternative Reference Rates Committee. ASC: Accounting Standards Codification. ASR: Accelerated share repurchase. 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. CARES Act: Coronavirus Aid, Relief, and Economic Security Act 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. 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. KCIC: Key Community Investment Capital LLC. KEF: Key Equipment Finance. 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 and any of the related variants;
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 failure or unavailability 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 and any of the related variants;
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 and any of the related variants;
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 and any of the related variants;
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;
our ability to develop and effectively use the quantitative models we rely upon in our business planning; and
labor shortages and supply chain constraints.

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

(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%.

We again achieved positive operating leverage for the third quarter. Revenue for the quarter was up from the prior year driven by record investment banking fees. Our consumer mortgage and Laurel Road business continues to drive record consumer loan originations continuing the momentum seen in the previous quarter.

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. Our net charge-offs to average loans remains low reflecting the strong credit quality of our portfolio.

Financial Return

A return on average tangible common equity in the range of 16.0% to 19.0%.

We have continued to maintain a strong level of capital. We ended the third quarter of 2021 with a Common Equity Tier 1 ratio of 9.6%. 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, as evidenced by the repurchase of $593 million in common shares during the quarter.

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						Nine Months Ended September 30,
Dollars in millions, except per share amounts	Third			Second			First			Fourth			Third				2021			2020
FOR THE PERIOD
Interest income	$	1,087		$	1,090		$	1,087		$	1,125		$	1,119			$	3,264		$	3,560
Interest expense	71			73			82			90			119				226			561
Net interest income	1,016			1,017			1,005			1,035			1,000				3,038			2,999
Provision for credit losses	(107)			(222)			(93)			20			160				(422)			1,001
Noninterest income	797			750			738			802			681				2,285			1,850
Noninterest expense	1,112			1,076			1,071			1,128			1,037				3,259			2,981
Income (loss) from continuing operations before income taxes	808			913			765			689			484				2,486			867
Income (loss) from continuing operations attributable to Key	643			724			618			575			424				1,985			754
Income (loss) from discontinued operations, net of taxes	2			5			4			7			4				11			7
Net income (loss) attributable to Key	645			729			622			582			428				1,996			761
Income (loss) from continuing operations attributable to Key common shareholders	616			698			591			549			397				1,905			674
Income (loss) from discontinued operations, net of taxes	2			5			4			7			4				11			7
Net income (loss) attributable to Key common shareholders	618			703			595			556			401				1,916			681
PER COMMON SHARE
Income (loss) from continuing operations attributable to Key common shareholders	$	.65		$	.73		$	.61		$	.57		$	.41			$	1.99		$	.70
Income (loss) from discontinued operations, net of taxes	—			—			—			—			—				.01			.01
Net income (loss) attributable to Key common shareholders (a)	.66			.73			.62			.57			.41				2.00			.70
Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution	.65			.72			.61			.56			.41				1.98			.69
Income (loss) from discontinued operations, net of taxes — assuming dilution	—			—			—			—			—				.01			.01
Net income (loss) attributable to Key common shareholders — assuming dilution (a)	.65			.73			.61			.57			.41				1.99			.70
Cash dividends paid	.185			.185			.185			.185			.185				.555			.555
Book value at period end	16.82			16.75			16.22			16.53			16.25				16.82			16.25
Tangible book value at period end	13.80			13.81			13.30			13.61			13.32				13.80			13.32
Weighted-average common shares outstanding (000)	942,446			957,423			964,878			967,987			967,804				955,069			967,632
Weighted-average common shares and potential common shares outstanding (000) (b)	952,523			967,163			974,297			976,460			973,988				964,781			974,280
AT PERIOD END
Loans	$	98,609		$	100,730		$	100,926		$	101,185		$	103,081			$	98,609		$	103,081
Earning assets	170,548			165,026			160,810			155,469			155,585				170,548			155,585
Total assets	187,035			181,115			176,203			170,336			170,540				187,035			170,540
Deposits	151,931			146,072			142,183			135,282			136,746				151,931			136,746
Long-term debt	13,165			13,211			12,499			13,709			12,685				13,165			12,685
Key common shareholders’ equity	15,610			16,041			15,734			16,081			15,822				15,610			15,822
Key shareholders’ equity	17,510			17,941			17,634			17,981			17,722				17,510			17,722
PERFORMANCE RATIOS — FROM CONTINUING OPERATIONS
Return on average total assets	1.41		%	1.63		%	1.44		%	1.35		%	1.00		%		1.50		%	.63		%
Return on average common equity	15.28			17.54			14.98			13.65			9.98				15.98			5.75
Return on average tangible common equity (c)	18.55			21.34			18.25			16.61			12.19				19.43			7.06
Net interest margin (TE)	2.47			2.52			2.61			2.70			2.62				2.53			2.78
Cash efficiency ratio (c)	60.2			59.9			60.3			60.3			60.6				60.1			60.2
PERFORMANCE RATIOS — FROM CONSOLIDATED OPERATIONS
Return on average total assets	1.41		%	1.64		%	1.45		%	1.36		%	1.00		%		1.50		%	.63		%
Return on average common equity	15.33			17.67			15.08			13.82			10.08				16.07			5.81
Return on average tangible common equity (c)	18.61			21.49			18.37			16.82			12.31				19.54			7.13
Net interest margin (TE)	2.46			2.55			2.60			2.69			2.62				2.52			2.78
Loan-to-deposit (d)	66.5			70.4			73.1			76.5			77.2				66.5			77.2
CAPITAL RATIOS AT PERIOD END
Key shareholders’ equity to assets	9.4		%	9.9		%	10.0		%	10.6		%	10.4		%		9.4		%	10.4		%
Key common shareholders’ equity to assets	8.4			8.9			9.0			9.5			9.3				8.4			9.3
Tangible common equity to tangible assets (c)	7.0			7.4			7.5			7.9			7.8				7.0			7.8
Common Equity Tier 1	9.6			9.9			9.9			9.7			9.5				9.6			9.5
Tier 1 risk-based capital	10.9			11.3			11.3			11.1			10.9				10.9			10.9
Total risk-based capital	12.7			13.2			13.4			13.4			13.3				12.7			13.3
Leverage	8.4			8.7			8.9			8.9			8.7				8.4			8.7
TRUST ASSETS
Assets under management	$	52,867		$	51,013		$	48,288		$	47,086		$	43,949			$	52,867		$	43,949
OTHER DATA
Average full-time-equivalent employees	17,009			17,003			17,086			17,029			17,097				17,034			16,758
Branches	1,000			1,014			1,068			1,073			1,077				1,000			1,077

(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

Our actions and results during the third quarter of 2021 support our corporate strategy described in the “Introduction” section under the “Corporate strategy” heading on page 45 of our 2020 Form 10-K.

We continued the momentum generated in the previous quarter to grow profitably and again achieved positive operating leverage for the third quarter. Revenue was up year over year driven by record third quarter investment banking fees. Both consumer mortgage and our Laurel Road business continue to drive consumer loan origination highs with $4.2 billion in originations for the third quarter.
Expanding targeted client relationships** continues to remain a focus as we continue to grow and deepen healthcare relationships across the franchise.
During the third quarter, we effectively managed risk as net loan charge-offs were .11% of average loans, below our targeted range.
We executed on the sale of our $3.3 billion indirect auto loan portfolio coupled with the purchase of senior notes from a securitization collateralized by the sold loans. The transaction removes potential credit risk and reduces reinvestment risk by way of Key holding the senior notes in the securitization.
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 third quarter, the Board of Directors approved a common share dividend of $.185 per Common Share. Key also completed $593 million in share repurchases under the current $1.5 billion share repurchase authorization. Of the total share repurchases, $468 million were repurchased under an ASR program.

Demographics

The Consumer Bank serves individuals and small businesses throughout our 15-state branch footprint as well as healthcare professionals nationally through our Laurel Road digital brand by offering a variety of deposit and investment products, personal finance and financial wellness services, lending, 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 September 30, 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 September 30, 2021 (c)
Common Equity Tier 1	4.5	%	2.5	%	7.0	%	9.6	%
Tier 1 Capital	6.0		2.5		8.5		10.9
Total Capital	8.0		2.5		10.5		12.7
Leverage (a)	4.0		N/A		4.0		8.4

(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 September 30, 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 restrictions 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 repurchases 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 would 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 be 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. On June 24, 2021, the Federal Reserve announced that all 23 firms that participated in the Federal Reserve’s 2021 supervisory stress test had capital levels above the required minimum and are no longer subject to the temporary additional restrictions on dividends and share repurchases.

For BHCs that are on a two-year stress test cycle and were not subject to the Federal Reserve’s supervisory stress test in 2021 (including KeyCorp), the temporary additional restrictions on dividends and share repurchases ended after June 30, 2021. Beginning on July 1, 2021, these firms are 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. In August 2021, the Federal Reserve re-confirmed that KeyCorp’s required stress capital buffer is 2.5%.

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.

Resolution plans

The FDIC’s resolution plan rule requires insured depository institutions (“IDIs”) with $50 billion or more in total assets to submit periodically to the FDIC a resolution plan that will facilitate the FDIC’s resolution of the institution under the Federal Deposit Insurance Act in the event of the institution’s failure. On April 16, 2019, the FDIC issued an advance notice of proposed rulemaking requesting public comment on potential changes to its resolution plan rule and extended the due date for the next resolution plan for all institutions until after the completion of the rulemaking. On January 19, 2021, the FDIC issued a statement announcing that it will resume requiring IDIs with $100 billion or more in total assets to submit resolution plans.

On June 25, 2021, the FDIC issued a statement describing the modified approach that it plans to take in implementing certain aspects of its resolution plan rule with respect to IDIs with $100 billion or more in total assets (including KeyBank). In this statement, the FDIC (i) indicated that these institutions will be required to submit

resolution plans on a three-year cycle; (ii) described the content requirements for these resolution plan submissions; and (iii) specified that there will be greater emphasis in the future on periodic engagement and capabilities testing by the FDIC with individual institutions. A key goal of the FDIC’s modified approach is to provide the FDIC with the information that it will need to meet the operational challenges of resolving an institution in a way that best preserves value and minimizes disruptions. The FDIC stated that resolution plans will be submitted in two groups, with the first group consisting of IDIs whose parent company is not a U.S. global systemically important bank or a Category II banking organization and the second group consisting of all other IDIs with $100 billion or more in total assets. KeyBank is in the first group.

See Item 1. Business of our 2020 Form 10-K under the heading “Supervision and Regulation - FDIA, Resolution Authority and Financial Stability” for a discussion of other recent developments concerning resolution plans.

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

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

On May 18, 2021, the OCC announced that it will reconsider a final rule that it adopted in 2020 to modernize the regulatory framework for implementing the CRA (the “2020 Final Rule”). The OCC said that it intends to evaluate issues and questions that have been raised concerning the 2020 Final Rule, consider additional stakeholder input, reassess relevant data, and take additional regulatory action, as appropriate. The OCC indicated that while its reconsideration is ongoing, banks subject to the 2020 Final Rule (including KeyBank) may suspend efforts to implement the provisions of the rule that have a compliance date of January 1, 2023, or January 1, 2024. In addition, the OCC stated that it does not plan to finalize a rule that it proposed in December 2020 to provide an approach for determining the benchmarks, thresholds, and minimums that would be used to assess a bank’s performance under the 2020 Final Rule. The OCC further said that it was discontinuing the CRA information collection published in December 2020 that relates to this subject.

On July 20, 2021, the OCC announced that it had completed its review of the 2020 Final Rule and that it plans to (i) propose rescinding the 2020 Final Rule; and (ii) work with the Federal Reserve and the FDIC to develop a joint rulemaking to strengthen and modernize regulations implementing the CRA. Also, on July 20, 2021, the OCC, the Federal Reserve, and the FDIC issued an interagency statement indicating that they are committed to working together to issue a joint rulemaking with respect to CRA modernization.

On September 8, 2021, the OCC requested public comment on a proposal to rescind the 2020 Final Rule and replace it with rules based largely on the CRA rules adopted jointly by the federal banking agencies in 1995. The OCC indicated that the adoption of this proposal would create consistency for all insured depository institutions and would facilitate the ongoing interagency work to modernize the CRA regulatory framework. Comments on the proposal were due by October 29, 2021.

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 other recent developments concerning the CRA.

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 extended 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 June 28, 2021, the CFPB issued a final rule that amends the CFPB’s mortgage servicing rules to help ensure that borrowers affected by the COVID-19 pandemic have a meaningful opportunity to be evaluated for loss mitigation before the initiation of foreclosure proceedings. Among other things, the final rule (i) establishes a temporary COVID-19 emergency pre-foreclosure review period that, with certain exceptions, prohibits servicers from commencing a foreclosure action involving a borrower’s principal residence until after December 31, 2021; (ii) permits servicers to offer borrowers experiencing a COVID-19 related hardship certain streamlined loan modification options based on the evaluation of an incomplete application; and (iii) revises 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. The final rule became effective on August 31, 2021. Certain requirements apply only until October 1, 2022.

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 September 30, 2020, to the three months ended September 30, 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 third quarter of 2021, an increase of $19 million compared to the third quarter of 2020. The increase in TE net interest income reflects higher earning asset balances and lower interest-bearing deposit costs, 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, partly offset by higher loan fees from PPP loan forgiveness.

For the nine months ended September 30, 2021, TE net interest income increased $40 million from the same period last year and net interest margin decreased by 15 basis points. TE net interest income benefited from higher earning asset balances, lower interest bearing deposit costs, and higher loan fees from PPP loan forgiveness, partially offset by a lower net interest margin. The lower net interest margin was impacted by a change in balance sheet mix, including elevated levels of liquidity, and lower earning asset yields, partially offset by higher loan fees. Net interest income was also impacted by one less day in 2021.

Average loans were $100.1 billion for the third quarter of 2021, a decrease of $4.8 billion compared to the third quarter of 2020. Commercial loans decreased $7.5 billion, reflecting decreased utilization versus the year-ago period and a decline in PPP balances. Consumer loans increased $2.7 billion, reflecting strength from Key's consumer mortgage business and Laurel Road, partly offset by the sale of the indirect auto loan portfolio.

Average deposits totaled $146.9 billion for the third quarter of 2021, an increase of $12.0 billion compared to the year-ago quarter, reflecting growth from consumer and commercial relationships, including higher commercial escrow deposits, partially offset by a decline in time deposits.

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 September 30, 2021						Three months ended September 30, 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)	$	49,868	$	445	3.54	%	$	57,067	$	474	3.31	%	$	(63)	$	34	$	(29)
Real estate — commercial mortgage	13,306		120		3.56		13,202		117		3.54		1		2		3
Real estate — construction	2,134		19		3.53		1,987		18		3.57		1		—		1
Commercial lease financing	3,922		27		2.80		4,488		35		3.10		(4)		(4)		(8)
Total commercial loans	69,230		611		3.50		76,744		644		3.34		(65)		32		(33)
Real estate — residential mortgage	13,168		92		2.78		8,398		73		3.46		35		(16)		19
Home equity loans	8,894		84		3.75		9,580		91		3.82		(6)		(1)		(7)
Consumer direct loans	5,175		59		4.55		4,403		56		5.07		9		(6)		3
Credit cards	917		23		10.07		967		25		10.24		(1)		(1)		(2)
Consumer indirect loans	2,754		22		3.15		4,827		44		3.66		(17)		(5)		(22)
Total consumer loans	30,908		280		3.60		28,175		289		4.10		20		(29)		(9)
Total loans	100,138		891		3.53		104,919		933		3.55		(45)		3		(42)
Loans held for sale	1,447		13		3.66		1,924		18		3.61		(4)		(1)		(5)
Securities available for sale (b), (e)	36,923		135		1.48		24,941		115		1.90		47		(27)		20
Held-to-maturity securities (b)	6,507		43		2.66		8,677		53		2.44		(14)		4		(10)
Trading account assets	743		4		2.19		686		3		2.08		—		1		1
Short-term investments	19,274		9		.18		12,525		1		.04		1		7		8
Other investments (e)	614		1		.99		640		2		1.49		—		(1)		(1)
Total earning assets	165,646		1,096		2.64		154,312		1,125		2.93		(15)		(14)		(29)
Allowance for loan and lease losses	(1,222)						(1,696)
Accrued income and other assets	16,947						16,195
Discontinued assets	618						752
Total assets	$	181,989					$	169,563

LIABILITIES
NOW and money market deposit accounts	$	85,333	10		.05		$	80,175	26		.13		2		(18)		(16)
Savings deposits	7,117		—		.01		5,478		1		.04		—		(1)		(1)
Certificates of deposit ($100,000 or more)	1,975		3		.59		3,862		16		1.60		(6)		(7)		(13)
Other time deposits	2,404		2		.26		3,735		11		1.17		(3)		(6)		(9)
Total interest-bearing deposits	96,829		15		.06		93,250		54		.23		(7)		(32)		(39)
Federal funds purchased and securities sold under repurchase agreements	231		—		.02		225		—		.05		—		—		—
Bank notes and other short-term borrowings	671		2		1.11		761		1		.68		—		1		1
Long-term debt (f), (g)	12,601		54		1.73		12,801		64		2.12		(1)		(9)		(10)
Total interest-bearing liabilities	110,332		71		.26		107,037		119		.45		(8)		(40)		(48)
Noninterest-bearing deposits	50,087						41,694
Accrued expense and other liabilities	3,053						2,350
Discontinued liabilities (g)	618						752
Total liabilities	164,090						151,833
EQUITY
Key shareholders’ equity	17,899						17,730
Noncontrolling interests	—						—
Total equity	17,899						17,730
Total liabilities and equity	$	181,989					$	169,563

Interest rate spread (TE)					2.38	%					2.48	%
Net interest income (TE) and net interest margin (TE)			1,025		2.47	%			1,006		2.62	%	$	(7)	$	26	19
TE adjustment (b)			9						6
Net interest income, GAAP basis			$	1,016					$	1,000

(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 September 30, 2021, and September 30, 2020.

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

(d)Commercial and industrial average balances include $137 million and $129 million of assets from commercial credit cards for the three months ended September 30, 2021, and September 30, 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.

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


	Nine months ended September 30, 2021						Nine months ended September 30, 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)	$	51,410	$	1,347	3.50	%	$	55,676	$	1,500	3.60	%	$	(113)	$	(40)	$	(153)
Real estate — commercial mortgage	12,932		351		3.63		13,419		400		3.98		(14)		(35)		(49)
Real estate — construction	2,111		58		3.65		1,804		55		4.06		9		(6)		3
Commercial lease financing	4,041		89		2.93		4,546		107		3.15		(11)		(7)		(18)
Total commercial loans	70,494		1,845		3.50		75,445		2,062		3.65		(129)		(88)		(217)
Real estate — residential mortgage	11,320		246		2.89		7,801		210		3.59		82		(46)		36
Home equity loans	9,089		257		3.78		9,894		301		4.07		(24)		(20)		(44)
Consumer direct loans	4,969		173		4.65		4,089		165		5.38		33		(25)		8
Credit cards	919		69		10.10		1,010		81		10.68		(7)		(5)		(12)
Consumer indirect loans	3,771		91		3.22		4,779		135		3.78		(26)		(18)		(44)
Total consumer loans	30,068		836		3.71		27,573		892		4.32		58		(114)		(56)
Total loans	100,562		2,681		3.56		103,018		2,954		3.83		(71)		(202)		(273)
Loans held for sale	1,531		35		3.03		2,090		58		3.68		(14)		(9)		(23)
Securities available for sale (b), (e)	33,553		398		1.60		22,297		365		2.25		151		(118)		33
Held-to-maturity securities (b)	6,713		133		2.64		9,274		171		2.46		(50)		12		(38)
Trading account assets	809		14		2.30		837		16		2.55		(1)		(1)		(2)
Short-term investments	18,211		20		.15		7,412		14		.24		14		(8)		6
Other investments (e)	616		5		1.14		642		3		.72		—		2		2
Total earning assets	161,995		3,286		2.71		145,570		3,581		3.30		29		(324)		(295)
Allowance for loan and lease losses	(1,427)						(1,403)
Accrued income and other assets	16,626						15,579
Discontinued assets	651						794
Total assets	$	177,845					$	160,540

LIABILITIES
NOW and money market deposit accounts	$	83,599	30		.05		$	74,087	194		.35		22		(186)		(164)
Savings deposits	6,730		1		.02		5,089		2		.04		1		(2)		(1)
Certificates of deposit ($100,000 or more)	2,250		13		.77		5,036		74		1.96		(29)		(32)		(61)
Other time deposits	2,644		8		.41		4,321		49		1.53		(14)		(27)		(41)
Total interest-bearing deposits	95,223		52		.07		88,533		319		.48		(20)		(247)		(267)
Federal funds purchased and securities sold under repurchase agreements	242		—		.03		821		6		.95		(2)		(4)		(6)
Bank notes and other short-term borrowings	764		6		.96		1,674		11		.87		(7)		2		(5)
Long-term debt (f), (g)	12,469		168		1.80		12,733		225		2.45		(5)		(52)		(57)
Total interest-bearing liabilities	108,698		226		.28		103,761		561		.73		(35)		(300)		(335)
Noninterest-bearing deposits	47,800						35,922
Accrued expense and other liabilities	2,853						2,518
Discontinued liabilities (g)	651						794
Total liabilities	160,002						142,995
EQUITY
Key shareholders’ equity	17,843						17,545
Noncontrolling interests	—						—
Total equity	17,843						17,545
Total liabilities and equity	$	177,845					$	160,540

Interest rate spread (TE)					2.44	%					2.57	%
Net interest income (TE) and net interest margin (TE)			3,060		2.53	%			3,020		2.78	%	$	64	$	(24)	$	40
TE adjustment (b)			22						21
Net interest income, GAAP basis			$	3,038					$	2,999

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

(b)Interest income on tax-exempt securities and loans has been adjusted to a taxable-equivalent basis using the statutory federal income tax rate of 21% for the nine months ended September 30, 2021, and September 30, 2020, respectively.

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

(d)Commercial and industrial average balances include $131 million and $137 million of assets from commercial credit cards for the nine months ended September 30, 2021, and September 30, 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 Key’s matched funds transfer pricing methodology to discontinued operations.

Provision for credit losses

Key’s provision for credit losses was a net benefit of $107 million, including a $136 million reserve release for the three months ended September 30, 2021, compared to an expense of $160 million for the three months ended September 30, 2020. The reserve release was largely driven by improvements in the economic outlook.

Noninterest income

As shown in Figure 5, noninterest income was $797 million, and represented 44% of total revenue for the third quarter of 2021, compared to $681 million, representing 40% 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 September 30, 2021, trust and investment services income was up $1 million, or 0.8%, compared to the same period one year ago. For the nine months ended September 30, 2021, trust and investment services income was up $11 million, or 2.9%, from the nine months ended September 30, 2020. This was primarily due to an increase in trust and asset management fees partially related to higher levels of assets under management and market activity offset by decreased institutional brokerage income.

A significant portion of our trust and investment services income depends on the value and mix of assets under management. At September 30, 2021, our bank, trust, and registered investment advisory subsidiaries had assets under management of $52.9 billion, compared to $43.9 billion at September 30, 2020. Assets under management were up, as shown in Figure 6, due to increased portfolio yields.

Figure 6. Assets Under Management


Dollars in millions	September 30, 2021		June 30, 2021		March 31, 2021		December 31, 2020		September 30, 2020
Discretionary assets under management by investment type:
Equity	$	31,361	$	30,952	$	29,071	$	27,384	$	24,851
Securities lending	13		135		155		131		130
Fixed income	13,673		13,384		11,865		12,130		11,767
Money market	4,425		3,266		4,127		4,495		4,564
Total Discretionary assets under management	49,472		47,737		45,218		44,140		41,312
Non-discretionary assets under management	3,395		3,276		3,070		2,946		2,637
Total assets under management	$	52,867	$	51,013	$	48,288	$	47,086	$	43,949

Investment banking and debt placement fees

Investment banking and debt placement fees consists of syndication fees, debt and equity securities underwriting fees, merger and acquistion and financial advisory fees, gains on sales of commercial mortgages, and agency origination fees. Investment banking and debt placement fees for the three months ended September 30, 2021,

increased $89 million, or 61.0%, from the year-ago quarter. For the nine months ended September 30, 2021, investment banking and debt placement fees increased $196 million, or 46.9%, from the nine months ended September 30, 2020. These increases were driven by the low rate environment and strong stock and merger and acquisiton markets.

Service charges on deposit accounts

Service charges on deposit accounts increased $14 million, or 18.2%, for the three months ended September 30, 2021, compared to the same period one year ago. For the nine months ended September 30, 2021, service charges on deposits increased $18 million, or 7.9% from the same period a year ago. These increases were primarily driven by higher account analysis fees as well as client balances and spending habits.

Cards and payments income

Cards and payments income, which consists of debit card, prepaid card, consumer and commercial credit card, and merchant services income, decreased $3 million, or 2.6%, for the three months ended September 30, 2021, compared to the same period one year ago as a result of decreased spend in prepaid card, partially offset by growth in credit and debit card volume and merchant services activity. For the nine months ended September 30, 2021, cards and payment income was up $58 million, or 21.4%, from the same period a year ago. This increase was the result of higher transaction volumes and increased spend related to debit and credit card products and increased activity from merchant services.

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 September 30, 2021, increased $15 million, or 6.9%, from the year-ago quarter. For the nine months ended September 30, 2021, other noninterest income increased $152 million, or 27.7%, from the nine months ended September 30, 2020. These increases stemmed from higher commercial mortgage servicing income and corporate services income.

Noninterest expense

As shown in Figure 7, noninterest expense was $1.1 billion for the third quarter of 2021, compared to $1.0 billion for the third quarter of 2020. Noninterest expense was $3.3 billion for the nine months ended September 30, 2021, compared to $3.0 billion for the nine months ended September 30, 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 $52 million, or 8.8%, for the three months ended September 30, 2021, compared to the same period one year ago. For the nine months ended September 30, 2021, personnel expense was up $212 million, or 12.7%, from the nine months ended September 30, 2020. These increases reflect higher incentive and stock-based compensation, attributed to an increase in revenue and stock performance and an increase in employee benefits compared to the year ago quarter and the nine months ended September 30, 2020.

Other noninterest expense

Other noninterest expense includes equipment, operating lease expense, marketing, intangible asset amortization, and other miscellaneous expense categories. Other noninterest expense for the three months ended September 30, 2021, increased $10 million, or 3.8%, from the year-ago quarter, primarily due to an increase in marketing expense related to Laurel Road. For the nine months ended September 30, 2021, other noninterest expense increased $8 million, or 1.0%, from the nine months ended September 30, 2020 also primarily resulting from increased marketing expense.

Income taxes

We recorded tax expense of $165 million for the third quarter of 2021 and $60 million for the third 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 $241 million for the third quarter of 2021, compared to $229 million for the year-ago quarter
Taxable-equivalent net interest income decreased by $16 million, or 2.7%, compared to the third quarter of 2020, driven by the lower interest rate environment, partially offset by strong consumer mortgage balance sheet growth and fees related to PPP loans
Average loans and leases increased $1.4 billion, or 3.8%, driven by growth in consumer mortgage, partially offset by the sale of the indirect auto loan portfolio totaling $3.3 billion
Average deposits increased $6.3 billion, or 7.6%, from the third quarter of 2020, driven by retention of consumer stimulus payments and relationship growth

Provision for credit losses decreased $35 million compared to the third quarter of 2020. The provision for credit losses was a net benefit and was driven by improvements in expected economic conditions and continued strength in client credit quality
Noninterest income increased $22 million, or 8.3%, from the year ago quarter, driven by higher service charges on deposit accounts and cards and payments income, partially offset by lower consumer mortgage income, due to lower gain on sale margins
Noninterest expense increased $24 million, or 4.2%, from the year ago quarter, driven by higher production-related incentives and support expenses related to higher loan volumes

Commercial Bank

Summary of operations

Net income attributable to Key of $384 million for the third quarter of 2021, compared to $173 million for the year-ago quarter
Taxable-equivalent net interest income decreased by $13 million, compared to the third quarter of 2020, as lower average loan balances offset fees related to PPP loans
Average loan and lease balances decreased $6.5 billion, compared to the third quarter of 2020, driven by lower commercial and industrial line draws and PPP loan forgiveness
Average deposit balances increased $5.0 billion, or 9.6%, compared to the third quarter of 2020, driven by growth in targeted relationships and the impact of government programs

Provision for credit losses decreased $219 million compared to the third quarter of 2020. The provision for credit losses was a net benefit and was driven by expected improvements in economic conditions
Noninterest income increased $93 million, from the year-ago quarter, driven by elevated investment banking client activity and commercial mortgage servicing fees, partially offset by lower cards and payments income as individuals roll off unemployment benefits
Noninterest expense increased by $23 million, or 5.1%, from the third quarter of 2020, driven by higher production-related incentives related to strong revenue production

Financial Condition

Loans and loans held for sale

Figure 8. Breakdown of Loans at September 30, 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 September 30, 2021, total loans outstanding from continuing operations were $98.6 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 September 30, 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
September 30, 2021
Dollars in millions	Completed Relief		In Active Relief		Total that have Received Payment Relief
Commercial Loans	$	2,092	$	58	$	2,150
Consumer Loans	883		115		998
Total Portfolio Loans and Leases	$	2,975	$	173	$	3,148
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 September 30, 2021, represented 0.1% of the commercial loan portfolio and the total outstanding balance of consumer loans in active relief as of September 30, 2021, represented 0.4% 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 September 30, 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 $69.3 billion at September 30, 2021, a decrease of $2.7 billion, or 3.7%, compared to December 31, 2020, driven by a decline in PPP balances. Excluding the impact of PPP loans, commercial loans increased $0.9 billion, or 1.3%, reflecting core portfolio growth in commercial and industrial loans and commercial real estate loans.

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 September 30, 2021, and December 31, 2020.

Figure 10. Select Commercial Portfolio Focus Areas


Dollars in millions	Outstanding as of September 30, 2021		Percentage of total loans as of September 30, 2021		Outstanding as of December 31, 2020		Percentage of total loans as of December 31, 2020
Consumer behavior (a)	$	5,149	5.2	%	$	5,083	5.0	%
Education	1,615		1.6		1,541		1.5
Sports	560		.6		690		.7
Restaurants	400		.4		400		.4

Retail commercial real estate (b)	349		.4		525		.5

Nondurable retail (c)	620		.6		638		.6

Travel/Tourism (d)	2,269		2.3		2,523		2.5
Hotels	698		.7		784		.8

Leveraged lending (e)	1,846		1.9		1,700		1.7

Oil and gas	1,862		1.9		1,992		2.0
Upstream (reserve based)	1,234		1.3		1,263		1.2
Midstream	371		.4		468		.5
Downstream	64		.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 September 30, 2021, and December 31, 2020.

Figure 11. Commercial Loans by Industry


September 30, 2021	Commercial and industrial		Commercial real estate		Commercial lease financing		Total commercial loans		Percent of total
Dollars in millions
Industry classification:
Agriculture	$	898	$	150	$	87	$	1,135	1.7	%
Automotive	1,093		592		18		1,703		2.5
Business products	1,580		133		42		1,755		2.5
Business services	3,355		229		189		3,773		5.4
Chemicals	764		35		22		821		1.2
Commercial real estate	6,325		11,085		9		17,419		25.1
Construction materials and contractors	2,354		323		238		2,915		4.2
Consumer goods	3,674		499		244		4,417		6.4
Consumer services	5,095		923		444		6,462		9.3
Equipment	1,431		82		115		1,628		2.3
Finance	6,328		87		369		6,784		9.8
Healthcare	3,040		1,365		254		4,659		6.7
Metals and mining	1,093		75		57		1,225		1.8
Oil and gas	1,825		22		40		1,887		2.7
Public exposure	2,947		16		674		3,637		5.2
Technology	679		10		183		872		1.3
Transportation	1,280		113		574		1,967		2.8
Utilities	5,055		—		407		5,462		7.9
Other	737		55		16		808		1.2
Total	$	49,553	$	15,794	$	3,982	$	69,329	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 goods	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 50% of our total loan portfolio at September 30, 2021, and 52% at December 31, 2020. This portfolio is approximately 78% variable rate and consists of loans originated primarily to large corporate, middle market, and small business clients.

Commercial and industrial loans totaled $49.6 billion at September 30, 2021, a decrease of $3.4 billion, or 6.3%, compared to December 31, 2020. The decline was broad-based and spread across most industry categories, reflecting an increase in the forgiveness of PPP loans in 2021. Excluding the the impact of PPP loans, commercial and industrial loans increased $0.2 billion, or 0.4%, and reflects a slight increase in commercial utilization rates.

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 September 30, 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 13% of commercial real estate loans at period end.

At September 30, 2021, commercial real estate loans totaled $15.8 billion, which includes $13.7 billion of mortgage loans and $2.1 billion of construction loans. Compared to December 31, 2020, this portfolio increased $1.1 billion, or 7.6%, driven by growth in multi-family lending. 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
September 30, 2021
Nonowner-occupied:
Retail properties	$	121	$	15	$	129	$	152	$	55	$	338	$	225	$	1,035	6.5	%	$	67	$	966
Multifamily properties	742		505		1,133		1,051		1,500		1,434		242		6,607		41.8		1,492		5,114
Health facilities	118		51		112		90		168		490		317		1,346		8.5		137		1,209
Office buildings	279		1		239		136		144		556		73		1,428		9.1		29		1,400
Warehouses	81		56		69		39		139		234		146		764		4.9		69		697
Manufacturing facilities	7		—		21		30		32		36		48		174		1.1		—		175
Hotels/Motels	75		—		21		4		16		108		97		321		2.0		19		302
Residential properties	—		—		—		3		—		47		—		50		.3		2		48
Land and development	13		4		4		2		5		25		—		53		.3		32		21
Other	130		21		9		81		57		203		264		765		4.9		59		705
Total nonowner-occupied	1,566		653		1,737		1,588		2,116		3,471		1,412		12,543		79.4		1,906		10,637
Owner-occupied	1,012		—		305		517		126		1,291		—		3,251		20.6		214		3,037
Total	$	2,578	$	653	$	2,042	$	2,105	$	2,242	$	4,762	$	1,412	$	15,794	100.0	%	$	2,120	$	13,674

Nonperforming loans	$	—	—		—		$	3	$	—	$	18	$	28	$	49	N/M		$	—	$	49
Accruing loans past due 90 days or more	—		—		—		1		—		5		—		6		N/M		1		5
Accruing loans past due 30 through 89 days	2		—		—		9		—		4		—		15		N/M		1		14

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	$	102	N/M		$	—	$	102
Accruing loans past due 90 days or more	—		—		—		1		—		22		—		23		N/M		1		22
Accruing loans past due 30 through 89 days	3		—		—		2		3		7		—		15		N/M		—		15


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 September 30, 2021 totaled $29.3 billion, an increase of $75.0 million, or .3%, from December 31, 2020. Consumer loans continue to reflect strength from the consumer mortgage business and Laurel Road, offset by the sale of the indirect auto loan portfolio, which reduced consumer loans by $3.3 billion.

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 30% of consumer loans outstanding at September 30, 2021.

We held the first lien position for approximately 70% of the home equity portfolio at September 30, 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


Dollars in millions	Real estate — residential mortgage		Home equity loans		Consumer direct loans		Credit cards		Consumer indirect loans		Total
September 30, 2021
New York	$	1,272	$	2,526	$	617	$	329	$	3	$	4,747
Ohio	1,042		1,339		464		196		9		3,050
Washington	3,772		1,128		228		79		3		5,210
Pennsylvania	343		645		291		51		4		1,334
California	1,521		14		383		3		12		1,933
Texas	160		5		313		4		5		487
Colorado	1,169		285		150		28		—		1,632
Connecticut	843		325		93		24		2		1,287
Oregon	964		702		109		39		1		1,815
Florida	523		53		326		12		10		924
Other	2,595		1,725		2,350		163		28		6,861
Total	$	14,204	$	8,747	$	5,324	$	928	$	77	$	29,280


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 nine months of 2021 and all of 2020.

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


Dollars in millions	Commercial		Commercial Real Estate		Commercial Lease Financing		Residential Real Estate		Consumer Direct		Consumer indirect		Total
2021

Third quarter	$	215	$	1,996	$	68	$	901	—		$	3,305	$	6,485
Second quarter	1,085		1,907		75		1,192		—		—		4,259
First quarter	124		1,930		156		1,129		—		—		3,339
Total	$	1,424	$	5,833	$	299	$	3,222	—		$	3,305	$	14,083
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


Dollars in millions	September 30, 2021		June 30, 2021		March 31, 2021		December 31, 2020		September 30, 2020
Commercial real estate loans	$	422,091	$	400,215	$	386,908	$	371,016	$	380,110
Residential mortgage	9,844		9,466		8,838		8,311		7,670
Education loans	442		465		489		516		540
Commercial lease financing	1,318		1,284		1,371		1,359		1,273
Commercial loans	743		716		695		684		652
Consumer direct	798		943		1,109		1,711		1,966
Consumer indirect	3,109		—		—		—		—
Total	$	438,345	$	413,089	$	399,410	$	383,597	$	392,211

In the event of default by a borrower, we are subject to recourse with respect to approximately $6.3 billion of the $438.3 billion of loans administered or serviced at September 30, 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 $49.0 billion at September 30, 2021, compared to $35.2 billion at December 31, 2020. Available-for-sale securities were $40.6 billion at September 30, 2021, compared to $27.6 billion at December 31, 2020. Held-to-maturity securities were $8.4 billion at September 30, 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


Dollars in millions	September 30, 2021		December 31, 2020
FHLMC	$	9,213	$	8,782
FNMA	17,317		13,213
GNMA	10,673		12,109
Total (a)	$	37,203	$	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 to help meet 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			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)
September 30, 2021
Remaining maturity:
One year or less	—			$	222		$	3		—			$	22		$	247		2.07	%
After one through five years	$	8,938		5,954			2,450			$	2,734		—			20,076			1.32
After five through ten years	—			8,943			2,740			5,444			1			17,128			1.50
After ten years	—			985			215			1,943			—			3,143			1.50
Fair value	$	8,938		$	16,104		$	5,408		$	10,121		$	23		$	40,594		—
Amortized cost	$	8,960		$	16,143		$	5,409		$	10,141		$	8		$	40,661		1.42	%
Weighted-average yield (b)	.36		%	1.56		%	1.60		%	2.02		%	.04		%	1.42		%	—
Weighted-average maturity	2.7 years			6.1 years			5.2 years			7.9 years			.6 years			5.7 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

The majority of our held-to-maturity portfolio consists of Federal agency CMOs and mortgage-backed securities. This portfolio is also comprised of asset-backed securities that were acquired as the result of balance sheet optimization strategies, including the indirect auto portfolio transaction in the third quarter of 2021. The remaining balance is comprised of foreign bonds. 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)
September 30, 2021
Remaining maturity:
One year or less	$	89		—			—			—			$	4		$	93		2.15	%
After one through five years	1,668			$	158		$	1,655		$	2,837		12			6,330			2.27
After five through ten years	728			26			1,246			—			—			2,000			2.63
After ten years	—			—			—			—			—			—			—
Amortized cost	$	2,485		$	184		$	2,901		$	2,837		$	16		$	8,423		2.36	%
Fair value	$	2,554		$	191		$	3,066		$	2,837		$	16		$	8,664		—
Weighted-average yield (b)	2.10		%	2.50		%	2.82		%	2.10		%	2.63		%	2.36		%	—
Weighted-average maturity	3.8 years			4.4 years			4.9 years			2.8 years			2.3 years			3.9 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 September 30, 2021

Deposits are our primary source of funding. At September 30, 2021, our deposits totaled $151.9 billion, an increase of $16.6 billion compared to December 31, 2020. The increase was driven by growth from consumer and commercial relationships, including higher commercial escrow deposits, as well as growth from the retention of consumer stimulus payments and lower consumer spending.

Wholesale funds, consisting of short-term borrowings and long-term debt, totaled $14.2 billion at September 30, 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:

Investing in our businesses, supporting our clients, and loan growth;
Maintaining or increasing our Common Share dividend; and
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 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 third 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 31,037 holders of record at September 30, 2021. Our book value per Common Share was $16.82 based on 930.5 million shares outstanding at September 30, 2021, compared to $16.53 per Common Share based on 975.8 million shares outstanding at December 31, 2020. At September 30, 2021, our tangible book value per Common Share was $13.80, 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	Third	Second	First	Fourth	Third
Shares outstanding at beginning of period	960,276	972,587	975,773	976,205	975,947
Open market repurchases, repurchases under an ASR program, and return of shares under employee compensation plans	(29,923)	(13,304)	(9,277)	(1,092)	(1)
Shares issued under employee compensation plans (net of cancellations)	191	993	6,091	660	259

Shares outstanding at end of period	930,544	960,276	972,587	975,773	976,205

As shown above, Common Shares outstanding decreased by 29.7 million shares during the third quarter of 2021 primarily driven by the execution of an ASR program.

At September 30, 2021, we had 326.2 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 September 30, 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 9.36% at September 30, 2021, compared to 10.56% at December 31, 2020. Our tangible common equity to tangible assets ratio was 6.97% at September 30, 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 September 30, 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 September 30, 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	September 30, 2021			December 31, 2020
COMMON EQUITY TIER 1
Key shareholders’ equity (GAAP)		$	17,510		$	17,981
Less:	Preferred Stock (a)	1,856			1,856
Add:	CECL phase-in (b)	234			375
	Common Equity Tier 1 capital before adjustments and deductions	15,888			16,500
Less:	Goodwill, net of deferred taxes	2,555			2,560
	Intangible assets, net of deferred taxes	141			151
	Deferred tax assets	1			1
	Net unrealized gains (losses) on available-for-sale securities, net of deferred taxes	77			583
	Accumulated gains (losses) on cash flow hedges, net of deferred taxes	169			460
	Amounts in AOCI attributed to pension and postretirement benefit costs, net of deferred taxes	(291)			(306)
	Total Common Equity Tier 1 capital	$	13,236		$	13,051
TIER 1 CAPITAL
Common Equity Tier 1		$	13,236		$	13,051
Additional Tier 1 capital instruments and related surplus		1,856			1,856

Less:	Deductions	—			—
	Total Tier 1 capital	15,092			14,907
TIER 2 CAPITAL
Tier 2 capital instruments and related surplus		1,539			1,657
Allowance for losses on loans and liability for losses on lending-related commitments (c)		958			1,412

Less:	Deductions	—			—
	Total Tier 2 capital	2,497			3,069
	Total risk-based capital	$	17,589		$	17,976
RISK-WEIGHTED ASSETS
Risk-weighted assets on balance sheet		$	103,111		$	103,604
Risk-weighted off-balance sheet exposure		33,991			29,240
Market risk-equivalent assets		1,305			1,354
Gross risk-weighted assets		138,407			134,198
Less:	Excess allowance for loan and lease losses	—			—
	Net risk-weighted assets	$	138,407		$	134,198
AVERAGE QUARTERLY TOTAL ASSETS		$	179,491		$	166,771
CAPITAL RATIOS
Tier 1 risk-based capital		10.90		%	11.11		%
Total risk-based capital		12.71		%	13.40		%
Leverage (d)		8.41		%	8.94		%
Common Equity Tier 1		9.56		%	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 $29 million and $36 million of allowance classified as “discontinued assets” on the balance sheet at September 30, 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 September 30, 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 September 30, 2021. Actual losses for the total covered portfolios did not exceed the aggregate daily VaR at a 99% confidence level during the quarter ended September 30, 2020. 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 $1.1 million at September 30, 2021, and $3.1 million at September 30, 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 September 30, 2021, and September 30, 2020.

Figure 22. VaR for Significant Portfolios of Covered Positions


	2021								2020
	Three months ended September 30,								Three months ended September 30,
Dollars in millions	High		Low		Mean		September 30,		High		Low		Mean		September 30,
Trading account assets:
Fixed income	$	1.4	$	.6	$	.9	$	1.0	$	3.0	$	1.1	$	2.0	$	2.5
Derivatives:
Interest rate	$	.2	$	.1	$	.1	$	.1	$	.9	$	.3	$	.5	$	.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 $6.6 million at September 30, 2021, and $3.1 million at September 30, 2020.The change in stressed VaR is primarily due to a change in the predetermined stress period from the 2008-2009 financial crisis to the COVID-19 period of 2019-2020. 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 September 30, 2021, and September 30, 2020.

Figure 23. Stressed VaR for Significant Portfolios of Covered Positions


	2021								2020
	Three months ended September 30,								Three months ended September 30,
Dollars in millions	High		Low		Mean		September 30,		High		Low		Mean		September 30,
Trading account assets:
Fixed income	$	6.4	$	1.8	$	4.1	$	5.8	$	3.0	$	.8	$	1.7	$	2.5
Derivatives:
Interest rate	$	.6	$	.3	$	.4	$	.5	$	.7	$	.1	$	.2	$	.4

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 $10 million at September 30, 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 the LIBOR Administrator will cease publishing all U.S. LIBOR tenors entirely after June 30, 2023. For most products, the most likely replacement benchmark 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 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 various SOFR-based benchmarks, including but not limited to, Daily Simple SOFR in Arrears, SOFR Compounded in Arrears, SOFR Averages in Advance, and Term SOFR. We have begun to quote alternative indexes other than LIBOR, such as SOFR and Term SOFR, and have begun to originate new loans in those indexes. We have also begun to originate a small number of new loans using credit sensitive rates.

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 our work to address contracts with LIBOR tenors 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 September 30, 2021, and September 30, 2020. At September 30, 2021, our simulated impact to changes in interest rates was moderate. The exposure to declining rates has increased from September 30, 2020 as a result of higher starting rate levels and a larger balance sheet compared to the September 30, 2020 analysis. Exposure to declining rates remains moderate given the relative low level of actual market rates, and the hedging and investing strategies employed. 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


	September 30, 2021				September 30, 2020
Basis point change assumption	-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	-4.06	%	5.50	%	-1.92	%	4.49	%

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 130 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 September 30, 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


	September 30, 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)	$	22,050	$	238		2.6	1.3	%	.1	%	$	21,035	$	632
Receive fixed/pay variable — conventional debt	7,892		204			3.4	1.6		.1		7,787		415
Receive fixed/pay variable — forward A/LM	—		—			—	—		—		—		—
Pay fixed/receive variable — conventional debt	50		(7)			6.8	.1		3.6		50		(11)
Pay fixed/receive variable — forward securities	6,280		168			9.1	.8		1.1		2,080		21
Total portfolio swaps	$	36,272	$	603	(c)	3.9	1.3	%	.3	%	$	30,952	$	1,057	(c)

Floors — conventional A/LM — purchased (b)	—		—			—	—		—		$	5,000	$	17
Floors — conventional A/LM — sold (b)	—		—			—	—		—		—		—
Total floors	—		—			—	—		—		$	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 $98 million and $145 million at September 30, 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 September 30, 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


September 30, 2021	Short-Term Borrowings	Long-Term Deposits (a)	Senior Long-Term Debt	Subordinated Long-Term Debt	Capital Securities	Preferred Stock
KEYCORP
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/A1	A3	Baa1	N/A	N/A
Fitch Ratings, Inc.	F1	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. F1 assigned by Fitch Ratings, Inc. is specific to KeyBank’s short-term deposit ratings.

Sources of liquidity

Our primary sources of funding for KeyBank include customer deposits, wholesale funding, and liquid assets. As of September 30, 2021, our consolidated loan-to-deposit ratio was 66%. 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 September 30, 2021, totaled $49.9 billion, consisting of $31.0 billion of unpledged securities, $27.6 million of securities available for secured funding at the FHLB, and $18.9 billion of net balances of federal funds sold and balances in our Federal Reserve account. Additionally, as of September 30, 2021, our unused borrowing capacity secured by loan collateral was $23.1 billion at the Federal Reserve Bank of Cleveland and $11.8 billion at the FHLB. During the third quarter of 2021, our secured term borrowings increased $0.9 million as additional advances were taken. 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 September 30, 2021, KeyCorp held $2.6 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 third quarter of 2021, KeyBank paid $800 million in cash dividends to KeyCorp. As of September 30, 2021, KeyBank had regulatory capacity to pay $1.0 billion 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 in the investment portfolio. 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 and Part II, Item 2 of this Form 10-Q. 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 nine-month periods ended September 30, 2021, and September 30, 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 (“Summary of Significant 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 September 30, 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 $542 million, or 33.3%, from December 31, 2020. The commercial ALLL decreased by $394 million, or 35.9%, from December 31, 2020, through September 30, 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 $148 million, or 28.1%, from December 31, 2020, through September 30, 2021, driven by updated economic forecasts that reflect improved economic outlooks.

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


	September 30, 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	$	462	42.6	%	50.3	%	$	678	41.7	%	52.3	%
Commercial real estate:
Commercial mortgage	184		17.0		13.9		327		20.1		12.5
Construction	27		2.4		2.1		47		2.9		2.0
Total commercial real estate loans	211		19.4		16.0		374		23.0		14.5
Commercial lease financing	32		3.0		4.0		47		2.9		4.3
Total commercial loans	705		65.0		70.3		1,099		67.6		71.1
Real estate — residential mortgage	88		8.1		14.4		102		6.3		9.2
Home equity loans	124		11.5		8.9		171		10.5		9.2
Consumer direct loans	105		9.7		5.4		128		5.3		4.7
Credit cards	59		5.4		1.0		87		7.9		1.0
Consumer indirect loans	3		0.3		—		39		2.4		4.8
Total consumer loans	379		35.0		29.7		527		32.4		28.9
Total ALLL — continuing operations (a)	$	1,084	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 $29 million at September 30, 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 September 30, 2021, decreased $99 million compared to the year-ago quarter and include the impact of the sale of the indirect auto loan portfolio of approximately $22 million. For the remainder of 2021, we expect net loan charge-offs to average loans to be less than 20 basis points.

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


	2021									2020
Dollars in millions	Third			Second			First			Fourth			Third
Commercial and industrial	$	7		$	9		$	65		$	104		$	92
Real estate — Commercial mortgage	(1)			(2)			34			1			11
Real estate — Construction	—			—			—			—			—
Commercial lease financing	(5)			—			3			19			10
Total commercial loans	1			7			102			124			113
Real estate — Residential mortgage	(3)			1			(1)			—			(1)
Home equity loans	(1)			3			1			—			1
Consumer direct loans	5			5			6			6			6
Credit cards	5			6			4			5			7
Consumer indirect loans	22			—			2			—			2
Total consumer loans	28			15			12			11			15
Total net loan charge-offs	$	29		$	22		$	114		$	135		$	128
Net loan charge-offs to average loans	.11		%	.09		%	.46		%	.53		%	.49		%
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 September 30,						Nine months ended September 30,
Dollars in millions	2021			2020			2021			2020
Average loans outstanding	$	100,138		$	104,919		$	100,562		$	103,018
Allowance for loan and lease losses at the end of the prior period	$	1,220		$	1,708		$	1,626		$	900
Cumulative effect from change in accounting principle (a)	—			—			—			204
Allowance for loan and lease losses at beginning of period	1,220			1,708			1,626			1,104
Loans charged off:
Commercial and industrial	27			101			141			232
Real estate — commercial mortgage	—			13			39			18
Real estate — construction	—			—			—			—
Commercial lease financing	1			10			5			16
Total commercial loans	28			124			185			266
Real estate — residential mortgage	(2)			—			(1)			2
Home equity loans	1			4			7			10
Consumer direct loans	7			8			22			30
Credit cards	6			9			21			32
Consumer indirect loans	26			6			38			22
Total consumer loans	38			27			87			96
Total loans charged off	66			151			272			362
Recoveries:
Commercial and industrial	20			9			60			19
Real estate — commercial mortgage	1			2			8			3
Real estate — construction	—			—			—			—
Commercial lease financing	6			—			7			1
Total commercial loans	27			11			75			23
Real estate — residential mortgage	1			1			2			1
Home equity loans	2			3			4			6
Consumer direct loans	2			2			6			6
Credit cards	1			2			6			6
Consumer indirect loans	4			4			14			12
Total consumer loans	10			12			32			31
Total recoveries	37			23			107			54
Net loan charge-offs	(29)			(128)			(165)			(308)
Provision (credit) for loan and lease losses	(107)			150			(377)			934

Allowance for loan and lease losses at end of period	$	1,084		$	1,730		$	1,084		$	1,730
Liability for credit losses on lending-related commitments at the end of the prior period	$	152		$	198		$	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	152			198			197			141
Provision (credit) for losses on off-balance sheet exposures	—			10			(45)			67
Liability for credit losses on off-balance sheet exposures at end of period (c)	$	152		$	208		$	152		$	208
Total allowance for credit losses at end of period	$	1,236		$	1,938		$	1,236		$	1,938
Net loan charge-offs to average total loans	.11		%	.49		%	.22		%	.40		%
Allowance for loan and lease losses to period-end loans	1.10			1.68			1.10			1.68
Allowance for credit losses to period-end loans	1.25			1.88			1.25			1.88
Allowance for loan and lease losses to nonperforming loans	195.7			207.4			195.7			207.4
Allowance for credit losses to nonperforming loans	223.1			232.4			223.1			232.4

Discontinued operations — education lending business:
Loans charged off	$	1		$	—		$	3		$	4
Recoveries	1			—			2			3
Net loan charge-offs	$	—		—			$	(1)		$	(1)

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

(b)For the nine month period ended September 30, 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 September 30, 2021, decreased $338 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 as well as continual declines in our nonperforming loan balance.

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

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


Dollars in millions	September 30, 2021			June 30, 2021			March 31, 2021			December 31, 2020			September 30, 2020
Commercial and industrial	$	253		$	355		$	387		$	385		$	459
Real estate — commercial mortgage	49			66			66			104			104
Real estate — construction	—			—			—			—			1
Total commercial real estate loans (a)	49			66			66			104			105
Commercial lease financing	5			7			8			8			6
Total commercial loans (b)	307			428			461			497			570
Real estate — residential mortgage	93			99			95			110			96
Home equity loans	146			146			148			154			146
Consumer direct loans	4			4			5			5			3
Credit cards	3			3			3			2			2
Consumer indirect loans	1			14			16			17			17
Total consumer loans	247			266			267			288			264
Total nonperforming loans	554			694			728			785			834
OREO	8			9			12			100			105
Nonperforming loans held for sale	35			32			47			49			61
Other nonperforming assets	2			3			3			3			3
Total nonperforming assets	$	599		$	738		$	790		$	937		$	1,003
Accruing loans past due 90 days or more	$	82		$	74		$	92		$	86		$	73
Accruing loans past due 30 through 89 days	164			190			191			241			336
Restructured loans — accruing and nonaccruing (c)	270			334			376			363			306
Restructured loans included in nonperforming loans (c)	146			177			192			229			168
Nonperforming assets from discontinued operations — education lending business	4			5			5			5			6
Nonperforming loans to period-end portfolio loans	.56		%	.69		%	.72		%	.78		%	.81		%
Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets	.61			.73			.78			.92			.97

(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
Dollars in millions	Third		Second		First		Fourth		Third
Balance at beginning of period	$	694	$	728	$	785	$	834	$	760
Loans placed on nonaccrual status	116		186		196		300		387
Charge-offs	(66)		(74)		(135)		(160)		(150)
Loans sold	(17)		(10)		(13)		(9)		(6)
Payments	(136)		(92)		(37)		(83)		(83)
Transfers to OREO	(1)		—		(3)		(3)		—


Loans returned to accrual status	(36)		(44)		(65)		(94)		(74)
Balance at end of period	$	554	$	694	$	728	$	785	$	834

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 intersects with 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. While operational and compliance risk are separate risk disciplines in Key’s ERM framework, losses and/or additional regulatory compliance costs are included in operational loss reporting and 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 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. 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 their customers. Recently, there have also been numerous highly publicized cases where hackers requested ransom payments in exchange for not disclosing

customer information or to restore company access to locked systems. 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															Nine months ended
Dollars in millions		9/30/2021			6/30/2021			3/31/2021			12/31/2020			9/30/2020			9/30/2021			9/30/2020
Tangible common equity to tangible assets at period-end
Key shareholders’ equity (GAAP)		$	17,510		$	17,941		$	17,634		$	17,981		$	17,722
Less:	Intangible assets (a)	2,814			2,828			2,842			2,848			2,862
	Preferred Stock (b)	1,856			1,856			1,856			1,856			1,856
	Tangible common equity (non-GAAP)	$	12,840		$	13,257		$	12,936		$	13,277		$	13,004
Total assets (GAAP)		$	187,035		$	181,115		$	176,203		$	170,336		$	170,540
Less:	Intangible assets (a)	2,814			2,828			2,842			2,848			2,862
	Tangible assets (non-GAAP)	$	184,221		$	178,287		$	173,361		$	167,488		$	167,678
	Tangible common equity to tangible assets ratio (non-GAAP)	6.97		%	7.44		%	7.46		%	7.93		%	7.76		%
Average tangible common equity
Average Key shareholders’ equity (GAAP)		$	17,899		$	17,859		$	17,769		$	17,905		$	17,730		$	17,843		$	17,545
Less:	Intangible assets (average) (c)	2,823			2,840			2,844			2,855			2,870			2,834			2,886
	Preferred Stock (average)	1,900			1,900			1,900			1,900			1,900			1,900			1,900
	Average tangible common equity (non-GAAP)	$	13,176		$	13,119		$	13,025		$	13,150		$	12,960		$	13,109		$	12,759
Return on average tangible common equity from continuing operations
Net income (loss) from continuing operations attributable to Key common shareholders (GAAP)		$	616		$	698		$	591		$	549		$	397		$	1,905		$	674
Average tangible common equity (non-GAAP)		13,176			13,119			13,025			13,150			12,960			13,109			12,759
Return on average tangible common equity from continuing operations (non-GAAP)		18.55		%	21.34		%	18.25		%	16.61		%	12.19		%	19.43		%	7.06		%
Return on average tangible common equity consolidated
Net income (loss) attributable to Key common shareholders (GAAP)		$	618		$	703		$	595		$	556		$	401		$	1,916		$	681
Average tangible common equity (non-GAAP)		13,176			13,119			13,025			13,150			12,960			13,109			12,759
Return on average tangible common equity consolidated (non-GAAP)		18.61		%	21.49		%	18.37		%	16.82		%	12.31		%	19.54		%	7.13		%

(a)For the three months ended September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020, and September 30, 2020, intangible assets exclude $3 million, $4 million, $4 million, $4 million, and $5 million, respectively, of period-end purchased credit card receivables.

(b)Net of capital surplus.

(c)For the three months ended September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020, and September 30, 2020, average intangible assets exclude $3 million, $4 million, $4 million, $5 million, and $5 million, respectively, of average purchased credit card receivables. For the nine months ended September 30, 2021 and September 30, 2020, average intangible assets exclude $4 million and $6 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															Nine months ended
Dollars in millions		9/30/2021			6/30/2021			3/31/2021			12/31/2020			9/30/2020			9/30/2021			9/30/2020
Cash efficiency ratio
Noninterest expense (GAAP)		$	1,112		$	1,076		$	1,071		$	1,128		$	1,037		$	3,259		$	2,981
Less:	Intangible asset amortization	15			14			15			15			15			44			50
Adjusted noninterest expense (non-GAAP)		$	1,097		$	1,062		$	1,056		$	1,113		$	1,022		$	3,215		$	2,931
Net interest income (GAAP)		$	1,016		$	1,017		$	1,005		$	1,035		$	1,000		$	3,038		$	2,999
Plus:	Taxable-equivalent adjustment	9			6			7			8			6			22			21
	Noninterest income (GAAP)	797			750			738			802			681			2,285			1,850
Total taxable-equivalent revenue (non-GAAP)		$	1,822		$	1,773		$	1,750		$	1,845		$	1,687		$	5,345		$	4,870
Cash efficiency ratio (non-GAAP)		60.2		%	59.9		%	60.3		%	60.3		%	60.6		%	60.1		%	60.2		%

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 nine 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 September 30, 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. This ASU provides relief from cumbersome accounting consequences for certain qualifying contract modifications undertaken as a result of reference rate reform.	Key has established an enterprise-wide program to identify and address all LIBOR related issues and will assess the impacts in conjunction with the reference rate transition as it occurs.

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


September 30, 2021	Short- and Long- Term Commercial Total (a)		Foreign Exchange and Derivatives with Collateral (b)		Net Exposure
Dollars in millions
France:
Sovereigns	—		—		—
Nonsovereign financial institutions	—		$	1	$	1
Nonsovereign non-financial institutions	—		—		—
Total	—		1		1
Germany:
Sovereigns	—		—		—
Nonsovereign financial institutions	—		—		—
Nonsovereign non-financial institutions	$	35	—		35
Total	35		—		35
Italy:
Sovereigns	—		—		—
Nonsovereign financial institutions	—		—		—
Nonsovereign non-financial institutions	17		—		17
Total	17		—		17















United Kingdom:
Sovereigns	—		—		—
Nonsovereign financial institutions	—		336		336
Nonsovereign non-financial institutions	—		—		—
Total	—		336		336





Total Europe:
Sovereigns	—		—		—
Nonsovereign financial institutions	—		337		337
Nonsovereign non-financial institutions	52		—		52
Total	$	52	$	337	$	389

(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.

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