UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

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

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

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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Introduction

This section reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the quarterly periods ended JuneSeptember 30, 2022, and JuneSeptember 30, 2021. 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.

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.

 

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.

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,” “will,” “would,” “should,” “could,” 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:

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, except as required by applicable securities laws. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our 2021 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.

Our actions and results during the secondthird quarter of 2022 support our corporate strategy described in the “Introduction” section under the “Corporate strategy” heading on page 47 of our 2021 Form 10-K.

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 consists of the Commercial and Institutional operating segments. The Commercial operating segment is a full-service, commercial banking platform that focuses primarily on serving the borrowing, cash management, and capital markets needs of middle market clients within Key’s 15-state branch footprint. It is also a significant, national, commercial real estate lender and third-party servicer of commercial mortgage loans and special servicer of CMBS. The Institutional operating segment operates nationally in providing lending, equipment financing, and banking products and services to large corporate and institutional clients. The industry coverage and product teams have established expertise in the following sectors: Consumer, Energy, Healthcare, Industrial, Public Sector, Real Estate, and Technology. The operating segment includes the KBCM platform which provides a broad suite of capital markets products and services including syndicated finance, debt and equity capital markets, derivatives, foreign exchange, financial advisory, and public finance. Additionally, KBCM provides fixed income and equity sales and trading services to investor clients.

The following discussion provides a summary of recent regulatory developments and should be read in conjunction with the disclosure included in our 2021 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 ruleKeyCorp and KeyBank are subject to implementregulatory capital requirements that are based largely on 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 (“Regulatory Capital Rules”) are discussed in more detail in Item 1. Business of our 2021 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 1 below. At JuneSeptember 30, 2022, KeyCorp’s ratios under the fully phased-in Regulatory Capital Rules are set forth in Figure 1.

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 2 identifies the capital category thresholds for a “well capitalized” and an “adequately capitalized” institution under the PCA Framework.

As of JuneSeptember 30, 2022, 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.

Capital planning and stress testing

See Item 1. Business of our 2021 Form 10-K under the heading “Supervision and Regulation - Regulatory capital requirements - Capital planning and stress testing” for a discussion of other recent developments concerning capital planning and stress testing requirements.

Liquidity requirements

See Item. 1 Business of our 2021 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.

See Item 1. Business of our 2021 Form 10-K under the heading “Supervision and Regulation – FDIA, Resolution Authority and Financial Stability” for a discussion of other recent developments concerning deposit insurance and assessments.

See Item 1. Business of our 2021 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 2021 Form 10-K under the heading “Supervision and Regulation - Other Regulatory Developments - Volcker Rule.”

Community Reinvestment Act

See Item 1. Business of our 2021 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

See Item 1. Business of our 2021 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

Federal LIBOR transition legislation

On March 15, 2022, President Biden signed into law the Consolidated Appropriations Act, 2022, which contains the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”). The LIBOR Act addresses certain issues relating to the transition from the use of LIBOR as a benchmark reference rate in contracts to the use of alternate reference rates. Among other things, the LIBOR Act (i) provides for the replacement, by operation of law, of LIBOR with a SOFR-based reference rate selected by the Federal Reserve for contracts which do not have effective fallback language; (ii) authorizes persons who have discretionary authority for selecting a LIBOR replacement to opt into a statutory safe harbor from liability by selecting the benchmark identified by the Federal Reserve; (iii) states that parties to a contract may opt out of the LIBOR Act; and (iv) provides that no federal supervisory agency may take supervisory action against a bank solely because the bank uses a benchmark rate other than SOFR. The LIBOR Act directs the Federal Reserve to promulgate regulations to implement this legislation by 180 days after the date of enactment.

Developments relating to climate change

On December 16, 2021, the OCC issued draft principles designed to provide a high-level framework for the safe and sound management of exposures to climate-related financial risks by national banks with more than $100 billion in total consolidated assets. The draft principles support efforts by banks to identify, measure, monitor, and mitigate the risks associated with climate change and encourage banks to incorporate consideration of climate-related financial risks into, among other things, strategic planning, credit underwriting, internal reporting, policies, procedures, and limits. The OCC requested public feedback on its draft principles by February 14, 2022, and said that it planned to elaborate on these principles in subsequent guidance that would distinguish roles and responsibilities of boards of directors and management, incorporate the feedback it receives, and consider lessons learned and best practices from the industry and other jurisdictions. Final principles or other guidance from the OCC regarding climate-related risk management would apply to KeyBank.

On March 21, 2022, the SEC issued for public comment a proposal to amend its rules under the Securities Act of 1933 and the Securities Exchange Act of 1934 to require public companies (including KeyCorp) to provide detailed climate-related information in their registration statements and periodic reports. Among other things, the proposal would require public companies to disclose information about (i) climate-related risks that are reasonably likely to have a material impact on the company’s business or financial statements over the short-, medium- or long-term; (ii) the actual and potential impacts of such risks on the company’s strategy, business model, and outlook; (iii) the role of the board of directors in overseeing climate-related risks and management’s role in assessing and managing such risks; (iv) the impact of climate-related events and transitional activities on line items in the company’s consolidated financial statements as well as the financial estimates and assumptions used in the financial statements; and (v) the company’s direct greenhouse gas emissions, indirect emissions from purchased energy, and, if material, indirect emissions from the company’s value chain (which may include financed emissions in a bank’s loan portfolio). The financial services industry has not yet adopted a standardized methodology for banks to use to quantitatively measure indirect emissions from a bank’s value chain, such as financed emissions. Accordingly, this proposal would require many banks to quantify and disclose financed emissions on a comprehensive scale for the first time. Comments on the SEC’s proposal were originally due by May 20, 2022. The comment period was extended to June 17, 2022. On October 7, 2022, the SEC reopened the comment period on this proposal until November 1, 2022, due to a technological error that resulted in a number of public comments submitted through the SEC’s comment website not being received by the SEC.

Computer-Security Incident Notification Requirements

Results of Operations

The following chart provides a reconciliation of net income from continuing operations attributable to Key common shareholders for the three months ended JuneSeptember 30, 2021, to the three months ended JuneSeptember 30, 2022 (dollars in millions):

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:

 

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 3 shows the various components of our balance sheet that affect interest income and expense and their respective yields or rates for the current periods and comparative year ago periods. 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.

Net interest income (TE) was $1.1$1.2 billion for the secondthird quarter of 2022 and the net interest margin was 2.61%2.74%. Compared to the secondthird quarter of 2021, net interest income (TE) increased $81$178 million and net interest margin increased by nine27 basis points. Net interest income (TE) and net interest margin benefited from higher earning asset balances, a favorable balance sheet mix, and higher interest rates. Net interest income (TE) and the net interest margin were negatively impacted by the exitsale of the indirect auto loan portfolio in the third quarter of 2021, higher interest-bearing deposit costs, and lower loan fees from the Paycheck Protection Program ("PPP")PPP.

For the sixnine months ended JuneSeptember 30, 2022, net interest income (TE) increased $89$267 million from the same period last year and net interest margin decreasedincreased by threeseven basis points. Net interest income (TE) and the net interest margin benefited from higher earning asset balances, higher interest rates, and a favorable balance sheet mix, higher interest rates, and lower interest-bearing deposit costs.mix. Net interest income (TE) and the net interest margin were negatively impacted by higher interest-bearing deposit costs, the exitsale of the indirect auto loan portfolio in the third quarter of 2021, and lower loan fees from the PPP.

Average loans were $109.1$114.4 billion for the secondthird quarter of 2022, an increase of $8.3$14.3 billion compared to the secondthird quarter of 2021. Commercial loans increased $4.2$9.1 billion, reflecting strength in commercial mortgage real estate loans and core commercial and industrial loans,loan growth, which mitigated the impact of a $6.8$4.0 billion decline in PPP balances.balances, and an increase in commercial mortgage real estate loans. Consumer loans increased $4.1$5.2 billion, due to strength fromlargely driven by Key's consumer mortgage business and Laurel Road, partly offset by the sale of the indirect auto loan portfolio.portfolio in the third quarter of 2021.

Average deposits totaled $147.5$144.2 billion for the secondthird quarter of 2022, an increasea decrease of $3.1$2.7 billion compared to the year-ago quarter. The increasedecrease reflects growth from consumer anddeclines in non-operating commercial relationships, including higher commercial escrow and retail deposits,deposit balances, partially offset by a declinean increase in timeretail deposits.

Key’s provision for credit losses was $45$109 million for the three months ended JuneSeptember 30, 2022, compared to a net benefit of $222$107 million for the three months ended JuneSeptember 30, 2021. The provision for credit losses was $128$237 million for the sixnine months ended JuneSeptember 30, 2022, compared to a net benefit of $315$422 million for the sixnine months ended JuneSeptember 30, 2021. The increase reflects the impact of a reserve release in each respective year-ago period as uncertainty caused by the pandemic subsided.subsided as well as changes in the economic outlook.