KEYCORP Page Number Introduction 38 Long-term financial targets 39 Corporate strategy 40 Strategic developments 40 Results of Operations 42 Earnings overview 42 Net interest income 42 Provision for credit losses 46 Noninterest income 46 Noninterest expense 48 Income taxes 50 Business Segment Results 50Consumer Bank 50Commercial Bank 52 Financial Condition 54 Loans and loans held for sale 54 Securities 59 Deposits and other sources of funds 61 Capital 61 Off-Balance Sheet Arrangements and Aggregate Contractual Obligations 63 Off-balance sheet arrangements 63 Contractual obligations 64 Guarantees 65 Risk Management 65 Overview 65 Market risk management 66 Liquidity risk management 71 Credit risk management 74 Operational and compliance risk management 78 GAAP to Non-GAAP Reconciliations 80 Fourth Quarter Results 81 Earnings 81 Net interest income 81 Noninterest income 81 Noninterest expense 81 Provision for credit losses 82 Income taxes 82 Critical Accounting Policies and Estimates 84 Allowance for loan and lease losses 84 Valuation methodologies 85 Derivatives and hedging 87 Contingent liabilities, guarantees and income taxes 87 Accounting and reporting developments 88 European Sovereign and Non-Sovereign Debt Exposures 89 37
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Introduction
This section reviews the financial condition and results of operations ofKeyCorp and its subsidiaries for 2019 and 2018. Some tables include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. When you read this discussion, you should also refer to the consolidated financial statements and related notes in this report. The page locations of specific sections that we refer to are presented in the table of contents. To review our financial condition and results of operations for 2017 and a comparison between the 2017 and 2018 results, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2018 Form 10-K filed with theSEC onFebruary 25, 2019 . 38
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Long-term financial targets [[Image Removed: chart-2af5bf2ad2df5130a6b.jpg]] (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.
[[Image Removed: chart-1a499578c02e5bba855.jpg]]
[[Image Removed: chart-6576a3f275495db287b.jpg]] (a) See the section entitled "GAAP to non-GAAP Reconciliations," which presents
the computations of certain financial measures related to "tangible common
equity." The section includes tables that reconcile the GAAP performance
measures to the corresponding non-GAAP measures, which provides a basis for
period-to-period comparisons.
Positive Operating Leverage
Generate positive operating leverage and a cash efficiency ratio in the range of 54.0% to 56.0%.
Full year expenses were down 1.9% from the prior year, as we completed our$200 million cost reduction program and drove further savings through our continuous improvement efforts. Overall, we have generated positive operating leverage over the past three years as our cash efficiency ratio has declined 390 basis points. We expect to make continued progress on our cash efficiency ratio during 2020 as we focus on expenses and strategically invest back into our business. Moderate Risk Profile
Maintain a moderate risk profile by targeting a net loan charge-offs to average loans ratio in the range of .40% to .60% through a credit cycle.
During 2019, our net loan charge-offs to average loans ratio was impacted by$139 million of net loan charge-offs related to a previously disclosed fraud loss. Overall, credit quality remains strong as we continue to remain consistent and disciplined in our credit underwriting and portfolio management and are committed to maintaining our moderate risk profile.
Financial Return
A return on average tangible common equity in the range of 16.00% to 19.00%.
During 2019, our return on average tangible common equity ratio was impacted by the previously disclosed fraud loss of$106 million , after taxes. During 2019, we repurchased$868 million of Common Shares. Our full-year dividend for 2019 was$.71 , a 26% increase from the previous year. In 2020, we remain committed to consistently delivering on our stated priorities of supporting organic growth, increasing dividends, and prudently repurchasing Common Shares. 39
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Corporate strategy
We remain committed to enhancing long-term shareholder value by continuing to execute our relationship-based business model, growing our franchise, and being disciplined in our capital management. Our strategic focus is to deliver ease, value, and expertise to help our clients make better financial decisions and build enduring relationships. We intend to pursue this strategy by growing profitably; acquiring and expanding targeted client relationships; effectively managing risk and rewards; maintaining financial strength; and engaging, retaining, and inspiring our diverse and high-performing workforce. These strategic priorities for enhancing long-term shareholder value are described in more detail below.
• Grow profitably - We intend to continue to focus on generating positive
operating leverage by growing revenue and creating a more efficient operating
environment. We expect our relationship business model to keep generating
organic growth as it helps us expand engagement with existing clients and
attract new customers. We plan to leverage our continuous improvement culture
to maintain an efficient cost structure that is aligned, sustainable, and
consistent with the current operating environment and that supports our
relationship business model.
• Acquire and expand targeted client relationships - We seek to be
client-centric in our actions and have taken purposeful steps to enhance our
ability to acquire and expand targeted relationships. We seek to provide
solutions to serve our clients' needs. We focus on markets and clients where
we can be the most relevant. In aligning our businesses and investments
against these targeted client segments, we are able to make a meaningful
impact for our clients.
• Effectively manage risk and rewards - Our risk management activities are
focused on ensuring we properly identify, measure, and manage risks across
the entire company to maintain safety and soundness and maximize
profitability.
• Maintain financial strength - With the foundation of a strong balance sheet,
we intend to remain focused on sustaining strong reserves, liquidity and
capital. We plan to work closely with our Board and regulators to manage
capital to support our clients' needs and drive long-term shareholder value.
Our capital remains a competitive advantage for us.
• Engage a high-performing, talented, and diverse workforce - Every day our
employees provide our clients with great ideas, extraordinary service, and
smart solutions. We intend to continue to engage our high-performing,
talented, and diverse workforce to create an environment where they can make
a difference, own their careers, be respected, and feel a sense of pride.
Strategic developments
We took the following actions during 2019 in support of our corporate strategy:
• We continued to grow profitably during 2019. Our cash efficiency ratio
improved to 59.6% and we achieved our seventh consecutive year of positive
operating leverage. Full year expenses were down 1.9% from the prior year as
we completed our
down for the year, reflecting the impact of lower interest rates. We
continued to see strong balance sheet growth as average loans were up 3.6%
and average deposits were up 4.7% compared to the prior year. Our
relationship-based business model continues to position us well with our
targeted clients, which results in new and expanded relationships.
• We acquired
consumer direct loans during the year, well above our original expectations.
These high quality loans provide us with an opportunity to build a broader
digital relationship with our clients. Our residential mortgage business is
another area where we are seeing strong returns on our investments.
Residential mortgage loan originations for 2019 were
120% from 2018, with
These two investments highlight our commitment to acquire and expand targeted
client relationships.
• During 2019, our net loan charge-offs to average loans ratio was impacted by
a previously disclosed fraud loss. Our provision for credit losses and net
loan charge-offs include
credit quality remains strong as our new loan originations in both our
commercial and consumer book continue to meet our criteria for high quality
loans as we continue to effectively manage risk and rewards.
• Maintaining financial strength while driving long-term shareholder value was
again a focus during 2019. At
Tier 1 risk-based capital ratios stood at 9.44% and 10.86%, respectively.
During 2019, we repurchased
capital plan authorization and
authorization. Our full-year dividend for 2019 was
the previous year.
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• We remained committed to our strategy to engage a high-performing, talented,
and diverse workforce. In 2019, we were recognized by multiple organizations
for our dedication to creating an environment where employees are treated
with respect and empowered to bring their authentic selves to work. Some of
these awards and recognitions included the
one of the Best Places to Work for LGBT Equality,
Spouse Employer, and receiving the Leading Disability Employer Seal from the
2019 Top 50 Companies for Diversity.
CEO Transition
OnSeptember 19, 2019 , we announced thatBeth Mooney will retire as Chairman and Chief Executive Officer ofKeyCorp , effectiveMay 1, 2020 . Our Board has appointedChristopher Gorman as President and Chief Operating Officer. The Board has also appointedMr. Gorman to the Board for a term expiring at our 2020 Annual Meeting of Shareholders.Mr. Gorman will succeedMs. Mooney as Chairman and Chief Executive Officer onMay 1, 2020 .Mr. Gorman's appointment is in keeping with the Board's succession management process and will ensure a seamless leadership transition.
LIBOR Transition
As disclosed in Item 1A. Risk Factors of this report, LIBOR in its current form is not expected to be available after 2021. The most likely replacement rate is expected to be SOFR, which has been recommended by the ARRC. TheFederal Reserve has encouraged financial institutions not to wait for the end of 2021 to make the transition away from LIBOR. We have established an enterprise wide program to identify and address all LIBOR transition issues. The goals of the LIBOR transition program are to:
• Identify and analyze LIBOR-based exposure and develop and execute transition
strategies;
• Review and update near-term strategies and actions for our current
LIBOR-based business currently being written;
• Assess financial impact and risk while planning and executing mitigation
actions;
• Understand and strategically address the current market approach to LIBOR and
SOFR; and
• Determine and execute system and process work to be operationally ready for
SOFR.
We are also collaborating closely with regulators and industry groups on the
transition. We also expect to leverage recommendations made by the ARRC and ISDA
that are tailored to our specific client segments.
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Table of Contents Results of Operations Earnings Overview
The following chart provides a reconciliation of net income from continuing
operations attributable to Key common shareholders for the year ended
[[Image Removed: chart-114f880a717a5920a0b.jpg]](a) Includes Net income (loss) attributable to noncontrolling interest and
Preferred dividends.
Net interest income One of our principal sources of revenue is net interest income. Net interest income is the difference between interest income received on earning assets (such as loans and securities) and loan-related fee income, and interest expense paid on deposits and borrowings. There are several factors that affect net interest income, including:
• the volume, pricing, mix, and maturity of earning assets and interest-bearing
liabilities;
• the volume and value of net free funds, such as noninterest-bearing deposits
and equity capital;
• the use of derivative instruments to manage interest rate risk;
• interest rate fluctuations and competitive conditions within the marketplace;
• asset quality; and
• fair value accounting of acquired earning assets and interest-bearing
liabilities.
To make it easier to compare both the results among several periods and the yields on various types of earning assets (some taxable, some not), we present net interest income in this discussion on a "TE basis" (i.e., as if all income were taxable and at the same rate). For example,$100 of tax-exempt income would be presented as$126 , an amount that, if taxed at the statutory federal income tax rate of 21%, would yield$100 . Prior to 2018,$100 of tax-exempt income would be presented as$154 , an amount that, if taxed at the previous statutory federal income tax rate of 35%, would yield$100 . Figure 1 shows the various components of our balance sheet that affect interest income and expense, and their respective yields or rates over the past five years. This figure also presents a reconciliation of TE net interest income to net interest income reported in accordance with GAAP for each of those years. The net interest margin, which is an indicator of the profitability of our earning assets less the cost of funding, is calculated by dividing taxable-equivalent net interest income by average earning assets. 42
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[[Image Removed: chart-fd3bc7ddebc954f3a37.jpg]]
TE net interest income for 2019 was $3.9 billion , and the net interest margin
was 3.04%, compared to TE net interest income of $3.9 billion and a net interest
margin of 3.17% for the prior year. Net interest income for 2019 reflects an
increase in earning asset balances, partially offset by a decline in loan fees
and a lower net interest margin. Additionally, purchase accounting accretion
declined $38 million . The net interest margin was impacted by a lag in deposit
pricing as interest rates moved lower during the second half of 2019. In 2020,
we expect TE net interest income to be up 1% to 3% compared to 2019 and the net
interest margin to be relatively stable compared to the fourth quarter of 2019.
[[Image Removed: chart-a37804bbac7a5ef4882.jpg]][[Image Removed: chart-e26bdbc99b075a5c9f2.jpg]]
(a) Average deposits for the year ended December 31, 2015 , exclude deposits in
foreign office.
Average loans totaled $91.5 billion for 2019, compared to $88.3 billion in 2018.
Commercial loans increased $2.1 billion , reflecting broad-based growth in
commercial and industrial loans, partially offset by declines in commercial
mortgage and construction loans. Consumer loans increased $1.1 billion , driven
by solid growth from Laurel Road , residential mortgage loans, and indirect auto
lending. For 2020, we expect average loans to be up 4% to 6% compared to 2019.
Average deposits totaled $110.0 billion for 2019, an increase of $5.0 billion
compared to 2018, reflecting growth from consumer and commercial relationships.
For 2020, we expect average deposits to be up 1% to 3% compared to 2019.
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Figure 1. Consolidated Average Balance Sheets, Net Interest Income, and
Yields/Rates from Continuing Operations
Year ended December 31, 2019 2018
Average Yield/ Average Yield/
dollars in millions Balance Interest (a) Rate (a) Balance Interest (a) Rate (a)
ASSETS
Loans (b), (c)
Commercial and industrial (d) $ 47,482 $ 2,144 4.51 % $ 44,418 $ 1,926 4.34 %
Real estate - commercial
mortgage 13,641 676 4.95 14,267 698 4.90
Real estate - construction 1,485 78 5.24 1,816 90 4.97
Commercial lease financing 4,488 163 3.63 4,534 168 3.70
Total commercial loans 67,096 3,061 4.56 65,035 2,882 4.43
Real estate - residential
mortgage 6,095 241 3.95 5,473 217 3.97
Home equity loans 10,634 526 4.95 11,530 547 4.74
Consumer direct loans 2,475 176 7.11 1,782 137 7.66
Credit cards 1,100 127 11.51 1,092 125 11.40
Consumer indirect loans 4,111 168 4.09 3,426 146 4.27
Total consumer loans 24,415 1,238 5.07 23,303 1,172 5.03
Total loans 91,511 4,299 4.70 88,338 4,054 4.59
Loans held for sale 1,411 63 4.48 1,501 66 4.43
Securities available for sale
(b), (e) 21,362 537 2.51 17,898 409 2.20
Held-to-maturity securities (b) 10,841 262 2.41 12,003 284 2.37
Trading account assets 1,017 32 3.18 893 29 3.25
Short-term investments 2,876 61 2.11 2,450 46 1.86
Other investments (e) 630 13 2.09 697 21 3.04
Total earning assets 129,648 5,267 4.06 123,780 4,909 3.94
Allowance for loan and lease
losses (880 ) (878 )
Accrued income and other assets 14,411 13,910
Discontinued assets 984 1,212
Total assets $ 144,163 $ 138,024
LIABILITIES
NOW and money market deposit
accounts $ 63,731 566 .89 $ 56,001 297 .53
Savings deposits 4,740 4 .09 5,704 14 .24
Certificates of deposit
($100,000 or more)(f) 7,757 180 2.32 7,728 139 1.80
Other time deposits 5,426 103 1.90 5,025 67 1.34
Deposits in foreign office - - - - - -
Total interest-bearing deposits 81,654 853 1.04 74,458 517 .69
Federal funds purchased and
securities sold under
repurchase agreements 264 2 .66 928 11 1.14
Bank notes and other short-term
borrowings 730 17 2.31 915 21 2.34
Long-term debt (f), (g) 13,062 454 3.52 12,715 420 3.27
Total interest-bearing
liabilities 95,710 1,326 1.39 89,016 969 1.09Noninterest-bearing deposits 28,376 30,593 Accrued expense and other liabilities 2,456 2,071 Discontinued liabilities (g) 984 1,212 Total liabilities 127,526 122,892 EQUITY Key shareholders' equity 16,636 15,131 Noncontrolling interests 1 1 Total equity 16,637 15,132 Total liabilities and equity$ 144,163 $ 138,024 Interest rate spread (TE) 2.67 % 2.85 % Net interest income (TE) and net interest margin (TE) 3,941 3.04 % 3,940 3.17 % Less: TE adjustment (b) 32 31 Net interest income, GAAP basis$ 3,909
(a) Results are from continuing operations. Interest excludes the interest
associated with the liabilities referred to in (g) below, calculated using a
matched funds transfer pricing methodology.
(b) Interest income on tax-exempt securities and loans has been adjusted to a TE
basis using the statutory federal income tax rate in effect that calendar
year.
(c) For purposes of these computations, nonaccrual loans are included in average
loan balances.
(d) Commercial and industrial average balances include
million,
credit cards for the years ended
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Figure 1. Consolidated Average Balance Sheets, Net Interest Income, and
Yields/Rates from Continuing Operations (Continued)
Compound Annual Rate of
2017 2016 2015 Change (2015-2019)
Average Yield/ Average Yield/ Average Yield/ Average
Balance Interest (a) Rate (a) Balance Interest (a) Rate (a) Balance Interest (a) Rate (a) Balance Interest
$ 40,848 $ 1,613 3.95 %$ 35,276 $ 1,215 3.45 %$ 29,658 $ 953 3.21 % 9.9 % 17.6 % 14,878 687 4.62 11,063 451 4.07 8,020 295 3.68 11.2 18.0 2,143 103 4.78 1,460 76 5.22 1,143 43 3.73 5.4 12.6 4,677 185 3.96 4,261 161 3.78 3,976 143 3.60 2.5 2.7 62,546 2,588 4.14 52,060 1,903 3.66 42,797 1,434 3.35 9.4 16.4 5,499 214 3.89 3,632 148 4.09 2,244 95 4.21 22.1 20.5 12,380 536 4.33 11,286 456 4.04 10,503 418 3.98 .2 4.7 1,765 126 7.12 1,661 113 6.79 1,580 103 6.54 9.4 11.3 1,055 118 11.15 916 98 10.73 752 81 10.76 7.9 9.4 3,120 148 4.75 1,593 89 5.58 718 46 6.43 41.8 29.6 23,819 1,142 4.79 19,088 904 4.74 15,797 743 4.70 9.1 10.8 86,365 3,730 4.32 71,148 2,807 3.95 58,594 2,177 3.71 9.3 14.6 1,325 52 3.96 979 34 3.51 959 37 3.85 8.0 11.2 18,548 369 1.96 16,661 329 1.98 13,720 293 2.14 9.3 12.9 10,515 222 2.11 6,275 122 1.94 4,936 96 1.95 17.0 22.2 949 27 2.81 884 23 2.59 761 21 2.80 6.0 8.8 2,363 26 1.11 4,656 22 .47 2,843 8 .27 .2 50.1 712 17 2.35 679 16 2.37 706 18 2.63 (2.3 ) (6.3 ) 120,777 4,443 3.67 101,282 3,353 3.31 82,519 2,650 3.21 9.5 14.7 (865 ) (835 ) (791 ) 2.2 13,807 12,090 10,298 7.0 1,448 1,707 2,132 (14.3 )$ 135,167 $ 114,244 $ 94,158 8.9 %$ 54,032 143 .26$ 46,079 87 .19$ 36,258 56 .15 11.9 % 58.8 6,569 13 .20 3,957 3 .07 2,372 - .02 14.9 - 6,233 82 1.31 3,911 48 1.22 2,041 26 1.28 30.6 47.3 4,698 40 .85 4,088 33 .81 3,115 22 .71 11.7 36.2 - - - - - - 489 1 .23 N/M N/M 71,532 278 .39 58,035 171 .30 44,275 105 .24 13.0 52.0 517 1 .24 487 1 .10 632 - .04 (16.0 ) - 1,140 15 1.34 852 10 1.18 572 9 1.52 5.0 13.6 11,921 319 2.69 9,802 218 2.29 7,332 160 2.24 12.2 23.2 85,110 613 .72 69,176 400 .58 52,811 274 .52 12.6 37.1 31,414 28,317 26,355 1.5 1,970 2,393 2,222 2.0 1,448 1,706 2,132 (14.3 ) 119,942 101,592 83,520 8.8 15,224 12,647 10,626 9.4 1 5 12 (39.2 ) 15,225 12,652 10,638 9.4$ 135,167 $ 114,244 $ 94,158 8.9 % 2.95 % 2.73 % 2.69 % 3,830 3.17 % 2,953 2.92 % 2,376 2.88 % 10.7 53 34 28 2.7$ 3,777 $ 2,919 $ 2,348 10.7 %
(e) Yield is calculated on the basis of amortized cost.
(f) Rate calculation excludes basis adjustments related to fair value hedges.
(g) A portion of long-term debt and the related interest expense is allocated to
discontinued liabilities as a result of applying our matched funds transfer
pricing methodology to discontinued operations.
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Figure 2 shows how the changes in yields or rates and average balances from the
prior year affected net interest income. The section entitled "Financial
Condition" contains additional discussion about changes in earning assets and
funding sources.
Figure 2. Components of Net Interest Income Changes from Continuing Operations
2019 vs. 2018
Average
in millions Volume Yield/ Rate Net Change(a)
INTEREST INCOME
Loans $ 146 $ 99 $ 245
Loans held for sale (4 ) 1 (3 )
Securities available for sale 84 44 128
Held-to-maturity securities (28 ) 6 (22 )
Trading account assets 4 (1 ) 3
Short-term investments 9 6 15
Other investments (2 ) (6 ) (8 )
Total interest income (TE) 209 149 358
INTEREST EXPENSE
NOW and money market deposit accounts 46 223 269
Savings deposits (2 ) (8 ) (10 )
Certificates of deposit ($100,000 or more) 1 40 41
Other time deposits 6 30 36
Total interest-bearing deposits 51 285 336
Federal funds purchased and securities sold under
repurchase agreements (6 ) (3 ) (9 )
Bank notes and other short-term borrowings (4 ) - (4 )
Long-term debt 12 22 34
Total interest expense 53 304 357
Net interest income (TE) $ 156 $ (155 ) $ 1
(a) The change in interest not due solely to volume or rate has been allocated in
proportion to the absolute dollar amounts of the change in each.
Provision for credit losses
[[Image Removed: chart-f6d5add2c994570ba6f.jpg]]
Our provision for credit losses was $445 million for 2019, compared to $246
million for 2018. The increase of $199 million in our provision for credit
losses is primarily due to the realization of $139 million from a previously
disclosed fraud loss. In 2020, given a relatively stable economic outlook, we
expect the provision to slightly exceed net loan charge-offs to provide for loan
growth.
Noninterest income
Noninterest income for 2019 was $2.5 billion , compared to $2.5 billion during
2018. Noninterest income represented 38% of total revenue for 2019 and 39% of
total revenue for 2018. In 2020, we expect noninterest income to be up 4% to 6%
compared to 2019.
The following discussion explains the composition of certain elements of our noninterest income and the factors that caused those elements to change.
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Figure 3. Noninterest Income[[Image Removed: chart-75c9dcde62e058929dd.jpg]][[Image Removed: chart-bc9a25c04d0f5ab4b9c.jpg]] (a) Other noninterest income includes operating lease income and other leasing
gains, corporate services income, corporate-owned life insurance income,
consumer mortgage income, mortgage servicing fees, and other income. See the
"Consolidated Statements of Income" in Part II, Item 8. Financial Statements
and Supplementary Data of this report.
[[Image Removed: chart-22a410f638655c7e98b.jpg]][[Image Removed: chart-5a25921401a8572da00.jpg]][[Image Removed: chart-fa0e6b1393d0387ed17.jpg]][[Image Removed: chart-ede35eaf5d465c6b9bc.jpg]] Trust and investment services income Trust and investment services income consists of brokerage commissions, trust and asset management commissions, and insurance income. For 2019, trust and investment services income decreased$24 million , or 4.8%, from the prior year primarily due to a decrease in insurance commissions as a result of the sale of KIBS in the second quarter of 2018, which contributed$22 million of income for 2018 prior to the sale. A significant portion of our trust and investment services income depends on the value and mix of assets under management. AtDecember 31, 2019 , our bank, trust, and registered investment advisory subsidiaries had assets under management of$40.8 billion , compared to$36.8 billion atDecember 31, 2018 . The increase from 2018 to 2019 was primarily attributable to the market appreciation during the year as the market recovered from a decline that occurred during the second half of 2018. 47
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Figure 4. Assets Under Management
Year ended December 31, Change 2019 vs. 2018
dollars in millions 2019 2018 Amount Percent
Assets under management by investment type: Equity$ 25,271 $ 21,325 $ 3,946 18.5 % Securities lending 309 774 (465 ) (60.1 ) Fixed income 11,000 10,696 304 2.8 Money market 4,253 3,980 273 6.9 Total$ 40,833 $ 36,775 $ 4,058 11.0 %
Investment banking and debt placement fees
Investment banking and debt placement fees consist of syndication fees, debt and equity financing fees, financial advisor fees, gains on sales of commercial mortgages, and agency origination fees. For 2019, investment banking and debt placement fees decreased$20 million , or 3.1%, from the prior year due to the market disruption from the government shutdown that occurred early in 2019.
Service charges on deposit accounts
Service charges on deposit accounts decreased
Cards and payments income
Cards and payments income, which consists of debit card, consumer and commercial credit card, and merchant services income, increased$5 million , or 1.9%, in 2019 compared to 2018. This increase was primarily due to higher debit card, credit card, and merchant fees.
Other noninterest income
Other noninterest income includes operating lease income and other leasing gains, corporate services income, corporate-owned life insurance income, consumer mortgage income, mortgage servicing fees, and other income. Other noninterest income decreased$5 million , or .7%, in 2019 compared to 2018. Other income was down primarily due to a$78 million gain related to the sale of KIBS during the second quarter of 2018. Partially offsetting this was an increase in operating lease income and other leasing gains which was negatively impacted by a$42 million lease residual loss in the second quarter of 2018, as well as higher consumer mortgage income and mortgage servicing fees reflecting our ongoing investment in our residential mortgage business. Noninterest expense Noninterest expense for 2019 was$3.9 billion , compared to$4.0 billion for 2018. Figure 5 gives a breakdown of our major categories of noninterest expense as a percentage of total noninterest expense for the twelve months endedDecember 31, 2019 . In 2020, we expect noninterest expense to be relatively stable compared to 2019.
The following discussion explains the composition of certain elements of our noninterest expense and the factors that caused those elements to change.
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Figure 5. Noninterest Expense[[Image Removed: chart-b912ed1fc18f5133a39.jpg]][[Image Removed: chart-2e7e59a4949f5b0783d.jpg]] (a) Other noninterest expense includes equipment, operating lease expense,
marketing,
and other expense. See the "Consolidated Statements of Income" in Part II,
Item 8. Financial Statements and Supplementary Data of this report.
[[Image Removed: chart-fa2fa68d022b5129b36.jpg]]Personnel
As shown in Figure 6, personnel expense, the largest category of our noninterest expense, decreased by$59 million , or 2.6%, in 2019 compared to 2018. The decrease reflected the successful implementation of our expense initiatives, which resulted in a$83 million decrease in salary and contract labor expense. Figure 6. Personnel Expense Year ended December 31, Change 2019 vs. 2018 dollars in millions 2019 2018 Amount Percent Salaries and contract labor$ 1,268 $ 1,351 $ (83 ) (6.1 )% Incentive and stock-based compensation (a) 584 569 15 2.7 Employee benefits 348 343 5 1.6 Severance 50 46 4 7.9 Total personnel expense$ 2,250 $ 2,309 $ (59 ) (2.6 )%
(a) Excludes directors' stock-based compensation of
reported as "other noninterest expense" in Figure 5.
Net occupancy
Net occupancy expense decreased
Other noninterest expense
Other noninterest expense includes equipment, operating lease expense,
marketing,
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Table of Contents Income taxes We recorded a tax provision from continuing operations of$314 million for 2019, compared to$344 million for 2018. The effective tax rate, which is the provision for income taxes as a percentage of income from continuing operations before income taxes, was 15.6% for 2019 and 2018. In 2020, we expect our GAAP tax rate to be in the range of 17% to 18%. In 2019, our federal tax expense and effective tax rate differ from the amount that would be calculated using the federal statutory tax rate; primarily from investments in tax-advantaged assets, such as corporate-owned life insurance, tax credits associated with investments in low-income housing projects and energy related projects, and periodic adjustments to our tax reserves as described in Note 14 ("Income Taxes").
Business Segments Results
We previously reported our results of operations through two business segments,Key Community Bank andKey Corporate Bank , with the remaining operations recorded in Other. In the first quarter of 2019, we underwent a company-wide organizational change, resulting in the realignment of our businesses into two reportable business segments,Consumer Bank andCommercial Bank , with the remaining operations that do not meet the criteria for disclosure as a separate reportable business recorded in Other. The new business segment structure aligns with how management reviews performance and makes decisions by client, segment, and business unit. Prior period information was restated to conform to the new business segment structure. This section summarizes the highlights and segment imperatives, market and business overview, and financial performance of our two major business segments (operating segments):Consumer Bank andCommercial Bank . Note 25 ("Business Segment Reporting") describes the products and services offered by each of these business segments and provides more detailed financial information pertaining to the segments. Dollars in the charts are presented in millions.
Segment imperatives
• Simplification and digitalization to drive growth and operating leverage
• Relationship-based strategy with a focus on financial wellness as a
differentiator
• Deliver ease, value, and expertise to help guide our clients to the right
approach to meet their goals
Market and business overview
As the banking industry moves forward, so do our clients. Anticipating our clients' needs not only today, but for tomorrow and into the future, has become one of the biggest challenges for the banking industry. We view these challenges as an opportunity to help our current client base meet their own goals, as well as attract new and diverse clients. In an increasingly digital world focused on specialized convenience, we have made meaningful steps to meet those demands through new digital portals and the acquisitions of HelloWallet in 2017 andLaurel Road in 2019. These platforms place us in a strong position to develop long lasting and meaningful relationships with our current and prospective clients. Financial wellness is a core tenet of our customer relationships and we see it in three different ways: diagnose, enhance, and sustain. Our goal is to get our clients to a place where they can comfortably sustain their current financial position so we can be there for them when they are ready to grow. Clients no longer go to a branch to conduct transactions only, they go to seek advice and gain new perspectives on issues they may be facing. Overall, we have a passion to help our clients through:
• Ease - enabling simple and clear banking with no surprises
• Value - knowing our clients and valuing each relationship
• Expertise - provide our clients with industry-leading expertise and
personalized service
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Summary of operations
• Net income attributable to Key of
million in 2018, an increase of 11.7%.
• Taxable equivalent net interest income increased in 2019 by
2.6%, from the prior year. The increase in net interest income was primarily
driven by strong balance sheet growth.
• Average loans and leases increased in 2019 by
prior year. This was driven by the addition of
strength in residential mortgage and indirect auto lending.
• Average deposits increased in 2019 by
year. This was driven by growth in money market and certificates of deposit,
reflecting Key's relationship strategy.
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• Provision for credit losses increased
prior year, driven by higher net loan charge-offs and balance sheet growth.
Credit quality in 2019 remained stable to 2018.
• Noninterest income increased in 2019 by
year, primarily driven by growth in consumer mortgage income.
• Noninterest expense decreased in 2019 by
year. The decline reflects the benefit of efficiency initiatives, strong
expense discipline, and the elimination of the
decline in expense was partially offset by expenses related to the
acquisition of
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Table of ContentsCommercial Bank Segment imperatives
• Solve complex client needs through a differentiated product set of banking
and capital markets capabilities
• Drive targeted scale through distinct product capabilities delivered to a
broad set of clients
• Utilize industry expertise and broad capabilities to build relationships with
narrowly targeted client sets
Market and business overview
Building relationships and delivering complex solutions for middle market clients requires a distinctive operating model that understands their business and can provide a broad set of product capabilities. As competition for these clients intensifies, we have positioned the business to maintain and grow our competitive advantage by building targeted scale in businesses and client segments. Strong market share in businesses such as real estate loan servicing and equipment finance highlights our ability to successfully meet customer needs through targeted scale in distinct product capabilities. Clients expect us to understand every aspect of their business. Our seven industry verticals are aligned to drive targeted scale in segments where we have a deep breadth of industry expertise. Healthcare is the largest sector of the economy and one of our targeted verticals. Our acquisition ofCain Brothers in 2017 is one example of how we have expanded our business capabilities to further enhance our reputation as a trusted advisor to current and prospective clients. Our business model is positioned to meet our client needs because our focus is not on being a universal bank, but rather being the right bank for our clients.
Summary of operations
• Net income attributable to Key of
billion in 2018, an increase of 3.6%.
• Taxable equivalent net interest income decreased in 2019 by
2.2%, from the prior year. The decrease in net interest income was primarily
driven by loan spread compression due to a lower rate environment, lower
purchase accounting accretion, and lower loan fees.
• Average loan and lease balances increased
compared to the prior year driven by broad-based growth in commercial and
industrial loans.
• Average deposit balances increased
the prior year, driven by growth in core deposits.
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• Provision for credit losses increased
prior year, driven by balance sheet growth, lower recoveries, and higher
charge-offs. Net charge-offs to average loans remained well below Key's long
term targeted range.
• Noninterest income increased
year. Operating lease income and other leasing gains increased
from the prior year driven by favorable client activity and a
lease residual loss in 2018.
• Noninterest expense decreased by
year. The decline reflects the benefit of efficiency initiatives, strong
expense discipline, and the elimination of the
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Financial Condition Loans and loans held for sale Figure 10 shows the composition of our loan portfolio atDecember 31 for each of the past five years. Figure 10. Composition of Loans 2019 2018 2017 December 31, Percent Percent Percent
dollars in millions Amount of Total Amount of Total
Amount of Total
COMMERCIAL
Commercial and
industrial (a) $ 48,295 51.0 % $ 45,753 51.1 % $ 41,859 48.4 %
Commercial real estate:
Commercial mortgage 13,491 14.3 14,285 15.9 14,088 16.3
Construction 1,558 1.6 1,666 1.9 1,960 2.3
Total commercial real
estate loans 15,049 15.9 15,951 17.8 16,048 18.6
Commercial lease
financing (b) 4,688 5.0 4,606 5.1 4,826 5.6
Total commercial loans 68,032 71.9 66,310 74.0 62,733 72.6
CONSUMER
Real estate -
residential mortgage 7,023 7.4 5,513 6.2 5,483 6.3
Home equity loans 10,274 10.9 11,142 12.4 12,028 13.9
Consumer direct loans 3,513 3.7 1,809 2.0 1,794 2.1
Credit cards 1,130 1.2 1,144 1.3 1,106 1.3
Consumer indirect loans 4,674 4.9 3,634 4.1 3,261 3.8
Total consumer loans 26,614 28.1 23,242 26.0 23,672 27.4
Total loans (c) $ 94,646 100.0 % $ 89,552 100.0 % $ 86,405 100.0 %
2016 2015
Percent Percent
Amount of Total Amount of Total
COMMERCIAL
Commercial and
industrial (a) $ 39,768 46.2 % $ 31,240 52.2 %
Commercial real estate:
Commercial mortgage 15,111 17.6 7,959 13.3
Construction 2,345 2.7 1,053 1.7
Total commercial real
estate loans 17,456 20.3 9,012 15.0
Commercial lease
financing (b) 4,685 5.5 4,020 6.7
Total commercial loans 61,909 72.0 44,272 73.9
CONSUMER
Real estate -
residential mortgage 5,547 6.4 2,242 3.7
Home equity loans 12,674 14.7 10,335 17.3
Consumer direct loans 1,788 2.1 1,600 2.7
Credit cards 1,111 1.3 806 1.3
Consumer indirect loans 3,009 3.5 621 1.1
Total consumer loans 24,129 28.0 15,604 26.1
Total loans (c) $ 86,038 100.0 % $ 59,876 100.0 %
(a) Loan balances include
and $85 million of commercial credit card balances at December 31,
2019 , December 31, 2018 , December 31, 2017 , December 31, 2016 , and
December 31, 2015 , respectively.
(b) Commercial lease financing includes receivables held as collateral for a
secured borrowing of
are based on the cash payments received from these related receivables.
Additional information pertaining to this secured borrowing is included in
Note 20 ("Long-Term Debt").
(c) Total loans exclude loans of
at
discontinued operations of the education lending business.
AtDecember 31, 2019 , total loans outstanding from continuing operations were$94.6 billion , compared to$89.6 billion at the end of 2018. For more information on balance sheet carrying value, see Note 1 ("Summary of Significant Accounting Policies") under the headings "Loans" and "Loans Held for Sale." Commercial loan portfolio Commercial loans outstanding were$68.0 billion atDecember 31, 2019 , an increase of$1.7 billion , or 2.6%, compared toDecember 31, 2018 , primarily driven by an increase in commercial and industrial loans. Figure 11 provides our commercial loan portfolio by industry classification as ofDecember 31, 2019 , andDecember 31, 2018 . 54
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Figure 11. Commercial Loans by Industry
December 31, 2019 Commercial and Commercial Commercial Total commercial Percent of dollars in millions
industrial real estate lease financing loans total
Industry classification:
Agriculture $ 1,036 $ 178 $ 112 $ 1,326 1.9 %
Automotive 2,048 467 18 2,533 3.7
Business products 1,513 111 57 1,681 2.5
Business services 3,083 203 210 3,496 5.2
Chemicals 776 40 46 862 1.3
Construction materials and
contractors 1,876 238 244 2,358 3.5
Consumer discretionary 3,646 400 467 4,513 6.6
Consumer services 4,567 863 535 5,965 8.8
Equipment 1,428 76 98 1,602 2.4
Finance 6,186 64 386 6,636 9.7
Healthcare 3,000 1,564 331 4,895 7.2
Materials manufacturing and
mining 1,117 44 41 1,202 1.8
Oil and gas 2,219 54 90 2,363 3.5
Public exposure 2,422 24 706 3,152 4.6
Commercial real estate 5,126 10,469 12 15,607 22.9
Technology 916 27 182 1,125 1.6
Transportation 1,298 218 737 2,253 3.3
Utilities 5,560 2 397 5,959 8.8
Other 478 7 19 504 .7
Total $ 48,295 $ 15,049 $ 4,688 $ 68,032 100.0 %
December 31, 2018 Commercial and Commercial Commercial Total commercial Percent of dollars in millions
industrial real estate lease financing loans total
Industry classification:
Agriculture $ 1,045 $ 176 $ 120 $ 1,341 2.0 %
Automotive 2,140 448 46 2,634 4.0
Business products 1,596 127 50 1,773 2.7
Business services 2,779 136 228 3,143 4.7
Chemicals 933 43 56 1,032 1.6
Construction materials and
contractors 1,756 207 221 2,184 3.3
Consumer discretionary 3,675 516 489 4,680 7.1
Consumer services 3,354 746 195 4,295 6.5
Equipment 1,586 89 81 1,756 2.6
Finance 5,178 459 357 5,994 9.0
Healthcare 2,999 1,743 369 5,111 7.7
Materials manufacturing and
mining 1,093 46 41 1,180 1.8
Oil and gas 1,739 51 57 1,847 2.8
Public exposure 2,656 73 1,054 3,783 5.7
Commercial real estate 5,808 10,830 28 16,666 25.1
Technology 996 28 64 1,088 1.6
Transportation 1,377 229 829 2,435 3.7
Utilities 4,357 4 321 4,682 7.1
Other 686 - - 686 1.0
Total $ 45,753 $ 15,951 $ 4,606 $ 66,310 100.0 %
Commercial and industrial. Commercial and industrial loans are the largest
component of our loan portfolio, representing 51% of our total loan portfolio at
December 31, 2019 , and 51% at December 31, 2018 . This portfolio is approximately
89% variable rate and consists of loans primarily to large corporate, middle
market, and small business clients.
Commercial and industrial loans totaled $48.3 billion at December 31, 2019 , an
increase of $2.5 billion compared to December 31, 2018 , driven by increases in
the finance, utilities, oil and gas, and consumer services industries, which
combined accounted for approximately 38% of the total portfolio mix at
December 31, 2019 .
Commercial real estate loans. Our commercial real estate lending business
includes both mortgage and construction loans, and is conducted through two
primary sources: our 15-state banking franchise, and KeyBank Real Estate
Capital , a national line of business that cultivates relationships with owners
of commercial real estate located both within and beyond the branch
system. Nonowner-occupied properties, generally properties for which at least
50% of the debt service is provided by rental income from nonaffiliated third
parties, represented 80% of total commercial real estate loans outstanding at
December 31, 2019 . Construction loans, which provide a stream of funding for
properties not fully leased at origination to support debt service payments over
the term of the contract or project, represented 10% of commercial real estate
loans at year end.
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AtDecember 31, 2019 , commercial real estate loans totaled$15.0 billion , comprised of$13.5 billion of mortgage loans and$1.6 billion of construction loans. Compared toDecember 31, 2018 , this portfolio decreased$902 million , driven by elevated paydowns as a result of competitive headwinds and strategic exits. As shown in Figure 12, our commercial real estate loan portfolio includes various property types and geographic locations of the underlying collateral. These loans include commercial mortgage and construction loans in bothConsumer Bank andCommercial Bank . Figure 12. Commercial Real Estate Loans Geographic Region Percent of Commercial dollars in millions West Southwest Central Midwest Southeast Northeast National Total Total Construction MortgageDecember 31, 2019 Nonowner-occupied: Retail properties$ 133 $ 41 $ 143 $ 155 $ 161 $ 580 $ 124 $ 1,337 8.9 % $ 85$ 1,252 Multifamily properties 698 354 767 795 1,205 1,350 225 5,394 35.8 1,189 4,205 Health facilities 76 44 104 93 163 497 405 1,382 9.2 40 1,342 Office buildings 214 7 293 132 244 725 134 1,749 11.6 69 1,680 Warehouses 51 34 51 51 46 238 134 605 4.0 7 598 Manufacturing facilities 36 - 38 4 40 43 54 215 1.4 5 210 Hotels/Motels 76 - 19 - 12 129 57 293 1.9 6 287 Residential properties - - - 2 - 98 - 100 .7 5 95 Land and development 20 5 - 3 2 9 - 39 .3 34 5 Other 80 9 71 86 22 259 358 885 5.9 23 862 Total nonowner-occupied 1,384 494 1,486 1,321 1,895 3,928 1,491 11,999 79.7 1,463 10,536 Owner-occupied 833 4 285 536 71 1,321 - 3,050 20.3 95 2,955 Total$ 2,217 $ 498 $ 1,771 $ 1,857 $ 1,966 $ 5,249 $ 1,491 $ 15,049 100.0 % $ 1,558$ 13,491 Nonowner-occupied: Nonperforming loans$ 1 - -$ 7 $ 7$ 20 $ 52 $ 87 N/M $ 2 $ 85 Accruing loans past due 90 days or more - - - 2 - 11 - 13 N/M 1 12 Accruing loans past due 30 through 89 days 1 - - 7 - 8 - 16 N/M 2 14 December 31, 2018 Nonowner-occupied: Retail properties$ 126 $ 45 $ 142 $ 174 $ 184 $ 674 $ 302 $ 1,647 10.3 % $ 82$ 1,565 Multifamily properties 452 210 914 608 1,153 1,708 693 5,738 36.0 1,163 4,575 Health facilities 98 - 49 59 153 724 385 1,468 9.2 20 1,449 Office buildings 270 7 224 90 165 851 119 1,726 10.8 120 1,605 Warehouses 66 34 20 47 71 290 203 731 4.6 48 684 Manufacturing facilities 42 - 36 3 25 38 91 235 1.5 20 215 Hotels/Motels 95 - 19 - 6 204 62 386 2.4 - 386 Residential properties 3 - - 3 21 135 - 162 1.0 53 109 Land and development 17 4 5 2 - 48 - 76 .5 52 23 Other 46 9 61 53 4 323 151 647 4.0 11 636 Total nonowner-occupied 1,215 309 1,470 1,039 1,782 4,995 2,006 12,816 80.3 1,569 11,247 Owner-occupied 837 25 283 493 58 1,439 - 3,135 19.7 97 3,038 Total$ 2,052 $ 334 $ 1,753 $ 1,532 $ 1,840 $ 6,434 $ 2,006 $ 15,951 100.0 % $ 1,666$ 14,285 Nonperforming loans$ 1 - -$ 8 - $ 7$ 53 $ 69 N/M - $ 69 Accruing loans past due 90 days or more - - - 2$ 11 11 - 24 N/M $ 12 12 Accruing loans past due 30 through 89 days - -$ 11 1 1 23 13 49 N/M 13 36 West - Alaska, California, Hawaii, Idaho, Montana, Oregon, Washington, and Wyoming
North Dakota ,Ohio ,South Dakota , andWisconsin
Mississippi ,North Carolina ,South Carolina ,Tennessee ,
Washington, D.C. , andWest Virginia
Pennsylvania ,Rhode Island , andVermont
National - Accounts in three or more regions
Consumer loan portfolio
Consumer loans outstanding at
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The home equity portfolio is comprised of loans originated by ourConsumer Bank within our 15-state footprint and is the largest segment of our consumer loan portfolio, representing approximately 39% of consumer loans outstanding at year end. As shown in Figure 8, we held the first lien position for approximately 61% of theConsumer Bank home equity portfolio atDecember 31, 2019 , and 60% atDecember 31, 2018 . For loans with real estate collateral, we track borrower performance monthly. Regardless of the lien position, credit metrics are refreshed quarterly, including recent FICO scores as well as original and updated loan-to-value ratios. This information is used in establishing the ALLL. Our methodology is described in Note 1 ("Summary of Significant Accounting Policies") under the heading "Allowance for Loan and Lease Losses." Figure 13. Consumer Loans by State Real estate - residential Home equity Consumer direct Consumer December 31, 2019 mortgage loans loans Credit cards indirect loans Total State New York $ 1,146$ 2,655 $ 548 $ 404 $ 797$ 5,550 Ohio 601 1,458 461 247 827 3,594 Washington 1,126 1,546 252 102 8 3,034 Pennsylvania 282 677 189 55 477 1,680 Connecticut 1,029 375 68 26 154 1,652 Oregon 517 852 94 48 2 1,513 Colorado 544 428 109 34 2 1,117 Maine 123 434 71 38 359 1,025 Indiana 117 412 131 47 118 825 Massachusetts 257 48 62 6 437 810 Other 1,281 1,389 1,528 123 1,493 5,814 Total $ 7,023$ 10,274 $ 3,513 $ 1,130 $ 4,674 $ 26,614 December 31, 2018 New York $ 1,117$ 2,881 $ 402 $ 415 $ 730$ 5,545 Ohio 479 1,538 383 252 506 3,158 Washington 714 1,714 234 104 11 2,777 Connecticut 1,090 413 30 23 143 1,699 Pennsylvania 275 726 83 52 276 1,412 Oregon 366 905 80 47 3 1,401 Colorado 256 509 76 35 2 878 Massachusetts 255 50 27 5 341 678 California 49 27 13 4 38 131 Texas 1 15 8 4 18 46 Other 911 2,364 473 203 1,566 5,517 Total $ 5,513$ 11,142 $ 1,809 $ 1,144 $ 3,634 $ 23,242 Loan sales As shown in Figure 14, during 2019, we sold$12.2 billion of our loans. Sales of loans classified as held for sale generated net gains of$188 million during 2019. 57
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Figure 14 summarizes our loan sales during 2019 and 2018.
Figure 14. Loans Sold (Including Loans Held for Sale)
Commercial
Commercial Lease Residential
in millions Commercial Real Estate Financing Real Estate Consumer Direct Total
2019
Fourth quarter $ 50 $ 3,138 $ 222 $ 559 - $ 3,969
Third quarter 220 2,600 68 569 $ 247 3,704
Second quarter 154 1,864 96 329 - 2,443
First quarter 301 1,536 34 225 - 2,096
Total $ 725 $ 9,138 $ 420 $ 1,682 $ 247 $ 12,212
2018
Fourth quarter $ 157 $ 4,918 $ 104 $ 331 - $ 5,510
Third quarter 247 2,242 52 302 - 2,843
Second quarter 253 2,266 144 308 - 2,971
First quarter 141 2,251 66 284 - 2,742
Total $ 798 $ 11,677 $ 366 $ 1,225 - $ 14,066 Figure 15 shows loans that are either administered or serviced by us but not recorded on the balance sheet; this includes loans that were sold.
Figure 15. Loans Administered or Serviced
December 31 ,
in millions 2019 2018 2017 2016 2015
Commercial real estate loans$ 347,186 $ 291,158 $ 238,718 $ 218,135 $ 211,274 Residential mortgage 6,146 5,209 4,582 4,198 - Education loans 625 766 932 1,122 1,339
Commercial lease financing 1,047 916 862 899
932 Commercial loans 591 549 488 418 335 Consumer direct 2,243 - - - - Total$ 357,838 $ 298,598 $ 245,582 $ 224,772 $ 213,880 In the event of default by a borrower, we are subject to recourse with respect to approximately$4.9 billion of the$358 billion of loans administered or serviced atDecember 31, 2019 . Additional information about this recourse arrangement is included in Note 22 ("Commitments, Contingent Liabilities, and Guarantees") under the heading "Recourse agreement withFNMA ." We derive income from several sources when retaining the right to administer or service loans that are sold. We earn noninterest income (recorded as "mortgage servicing fees") from fees for servicing or administering loans. This fee income is reduced by the amortization of related servicing assets. In addition, we earn interest income from investing funds generated by escrow deposits collected in connection with the servicing loans. Additional information about our mortgage servicing assets is included in Note 9 ("Mortgage Servicing Assets").
Maturities and sensitivity of certain loans to changes in interest rates
Figure 16 shows the remaining maturities of certain commercial and real estate loans, and the sensitivity of those loans to changes in interest rates. AtDecember 31, 2019 , approximately 27% of these outstanding loans were scheduled to mature within one year. Figure 16. Remaining Maturities and Sensitivity of Certain Loans to Changes in Interest RatesDecember 31, 2019 in millions Within One Year One - Five Years Over Five Years Total Commercial and industrial $ 12,529 $ 28,246 $ 7,520$ 48,295 Real estate - construction 896 532 130 1,558 Total $ 13,425 $ 28,778 $ 7,650$ 49,853 Loans with floating or adjustable interest rates (a) $ 25,631 $ 4,602$ 30,233 Loans with predetermined interest rates (b) 3,147 3,048 6,195 Total $ 28,778 $ 7,650$ 36,428
(a) Floating and adjustable rates vary in relation to other interest rates (such
as the base lending rate) or a variable index that may change during the term
of the loan.
(b) Predetermined interest rates either are fixed or may change during the term
of the loan according to a specific formula or schedule.
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Securities
Our securities portfolio totaled$31.9 billion atDecember 31, 2019 , compared to$30.9 billion atDecember 31, 2018 . Available-for-sale securities were$21.8 billion atDecember 31, 2019 , compared to$19.4 billion atDecember 31, 2018 . Held-to-maturity securities were$10.1 billion atDecember 31, 2019 , compared to$11.5 billion atDecember 31, 2018 . As shown in Figure 17, all of our mortgage-backed securities, which include both securities available-for-sale and held-to-maturity securities, are issued by government-sponsored enterprises or GNMA, and are traded in liquid secondary markets. These securities are recorded on the balance sheet at fair value for the available-for-sale portfolio and at cost for the held-to-maturity portfolio. For more information about these securities, see Note 6 ("Fair Value Measurements") under the heading "Qualitative Disclosures of Valuation Techniques," and Note 7 ("Securities"). Figure 17. Mortgage-Backed Securities by IssuerDecember 31 , in millions 2019 2018 FHLMC$ 5,115 $ 7,048 FNMA 12,308 10,076 GNMA 14,112 13,637
Total (a)
(a) Includes securities held in the available-for-sale and held-to-maturity
portfolios.
[[Image Removed: chart-7c3284d0279b5e11980.jpg]][[Image Removed: chart-e075ac0b6457556eae9.jpg]] Securities available for sale
The majority of our securities available-for-sale portfolio consists of Federal
Agency CMOs and mortgage-backed securities. CMOs are debt securities secured by
a pool of mortgages or mortgage-backed securities. These mortgage securities
generate interest income, serve as collateral to support certain pledging
agreements, and provide liquidity value under regulatory requirements.
We periodically evaluate our securities available-for-sale portfolio in light of
established A/LM objectives, changing market conditions that could affect the
profitability of the portfolio, the regulatory environment, and the level of
interest rate risk to which we are exposed. These evaluations may cause us to
take steps to adjust our overall balance sheet positioning.
In addition, the size and composition of our securities available-for-sale
portfolio could vary with our needs for liquidity and the extent to which we are
required (or elect) to hold these assets as collateral to secure public funds
and trust deposits. Although we generally use debt securities for this purpose,
other assets, such as securities purchased under resale agreements or letters of
credit, are used occasionally when they provide a lower cost of collateral or
more favorable risk profiles.
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Our investing activities continue to complement other balance sheet developments and provide for our ongoing liquidity management needs. Our actions to not reinvest the monthly security cash flows at various times served to provide the liquidity necessary to address our funding requirements. These funding requirements included ongoing loan growth and occasional debt maturities. At other times, we may make additional investments that go beyond the replacement of maturities or mortgage security cash flows as our liquidity position and/or interest rate risk management strategies may require. Lastly, our focus on investing in high quality liquid assets, including GNMA-related securities, is related to liquidity management strategies to satisfy regulatory requirements.
Figure 18 shows the composition, TE yields, and remaining maturities of our securities available for sale. For more information about these securities, including gross unrealized gains and losses by type of security and securities pledged, see Note 7 ("Securities").
Figure 18. Securities Available for Sale
Agency
Residential
U.S. Treasury, Collateralized Agency Residential Agency Commercial
Agencies, and States and Political Mortgage Mortgage-backed Mortgage-backed Other Weighted-Average
dollars in millions Corporations Subdivisions Obligations(a) Securities(a),(b) Securities(a) Securities Total Yield(b)
December 31, 2019
Remaining maturity:
One year or less $ 294 $ 4 $ 182 $ 3 - $ 11 $ 494 2.12 %
After one through five years 40 - 11,923 1,339 $ 4,184 - 17,486 2.46
After five through ten years - - 678 365 2,813 - 3,856 2.82
After ten years - - - 7 - - 7 3.07
Fair value $ 334 $ 4 $ 12,783 $ 1,714 $ 6,997 $ 11 $ 21,843 -
Amortized cost 334 4 12,772 1,677 6,898 7 21,692 2.52 %
Weighted-average yield (b) 1.86 % 5.52 % 2.34 % 2.76 % 2.81 % - 2.52 % -
Weighted-average maturity .7 years .8 years 3.3 years 4.1 years 5.0 years .5 years 3.9 years -
December 31, 2018
Fair value $ 147 $ 7 $ 13,962 $ 2,105 $ 3,187 $ 20 $ 19,428 -
Amortized cost 150 7 14,315 2,128 3,300 17 19,917 2.46 %
(a) Maturity is based upon expected average lives rather than contractual terms.
(b) Weighted-average yields are calculated based on amortized cost. Such yields
have been adjusted to a TE basis using the statutory federal income tax rate
in effect that calendar year.
Held-to-maturity securities
Federal Agency CMOs and mortgage-backed securities constitute essentially all of
our held-to-maturity securities. The remaining balance comprises asset-back
securities and foreign bonds. Figure 19 shows the composition, yields, and
remaining maturities of these securities.
Figure 19. Held-to-Maturity Securities
Agency
Residential Agency
Collateralized Residential Agency Commercial
dollars in Mortgage Mortgage-backed Mortgage-backed Other Weighted-Average
millions Obligations(a) Securities(a) Securities(a) Asset-backed securities Securities Total Yield(b)December 31, 2019 Remaining maturity: One year or less $ 59 - - $ 3 $ 4$ 66 1.95 % After one through five years 4,970 $ 162 $ 2,022 8 11 7,173 2.35 After five through ten years 663 247 1,918 - - 2,828 2.64 After ten years - - - - - - - Amortized cost$ 5,692 $ 409 $ 3,940 $ 11 $ 15$ 10,067 2.43 % Fair value 5,666 415 4,009 11 15 10,116 - Weighted-average yield(b) 2.12 % 2.63 % 2.86 % 2.48 % 3.29 % 2.43 % - Weighted-average maturity 3.5 years 5.5 years 5.5 years .4 years 1.9 years 4.4 years - December 31, 2018 Amortized cost$ 7,021 $ 490 $ 3,996 - $ 12$ 11,519 2.41 % Fair value 6,769 476 3,865 - 12 11,122 -
(a) Maturity is based upon expected average lives rather than contractual terms.
(b) Weighted-average yields are calculated based on amortized cost. Such yields
have been adjusted to a TE basis using the statutory federal income tax rate
in effect that calendar year.
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Deposits and other sources of funds
Figure 20. Breakdown of Deposits at December 31, 2019
[[Image Removed: chart-d08dd3c442a0546d96c.jpg]][[Image Removed: chart-6d28972dc72e579aa06.jpg]]Deposits
are our primary source of funding. At December 31, 2019 , our deposits totaled
$111.9 billion , an increase of $4.6 billion , compared to December 31, 2018 . The
increase in deposits compared to the prior year reflects our strategy to acquire
and expand client relationships.
Wholesale funds, consisting of short-term borrowings and long-term debt, totaled
$13.5 billion at December 31, 2019 , compared to $14.6 billion at December 31,
2018 . The decrease from the prior year reflects a shift in funding mix stemming
from strong deposit growth.
Figure 21 shows the maturity distribution of time deposits of $100,000 or more.
Figure 21. Maturity Distribution of Time Deposits of
Total
Remaining maturity:
Three months or less $ 1,748
After three through six months 1,727
After six through twelve months 2,209
After twelve months 914
Total $ 6,598
Capital
The objective of management of capital is to maintain capital levels consistent
with our risk appetite and sufficient in size to operate within a wide range of
operating environments. We have identified three primary uses of capital:
1. Investing in our businesses, supporting our clients, and loan growth;
2. Maintaining or increasing our Common Share dividend; and
3. Returning capital in the form of Common Share repurchases to our
shareholders.
The following sections discuss certain ways we have deployed our capital. For
further information, see the Consolidated Statements of Changes in Equity and
Note 24 ("Shareholders' Equity").
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[[Image Removed: chart-a4afe8a868f15bc3b38.jpg]][[Image Removed: chart-9254212dca905597be5.jpg]] (a) Common Share repurchases were suspended during the third quarter of 2015 due
to the then pending merger with First Niagara. We resumed our Common Share
repurchase program during the third quarter of 2016 upon the completion of
the First Niagara merger.
Dividends
Consistent with our 2018 capital plan, the Board declared a quarterly dividend of$.170 per Common Share for the first and second quarters of 2019. The Board declared a quarterly dividend of$.185 per Common Share for the third and fourth quarters of 2019, consistent with our 2019 capital plan. These quarterly dividend payments brought our annual dividend to$.71 per Common Share for 2019. Common Shares outstanding Our Common Shares are traded on the NYSE under the symbol KEY with 32,943 holders of record atFebruary 21, 2020 . Our book value per Common Share was$15.54 based on 977.2 million shares outstanding atDecember 31, 2019 , compared to$13.90 based on 1.020 billion shares outstanding atDecember 31, 2018 . AtDecember 31, 2019 , our tangible book value per Common Share was$12.56 , compared to$11.14 atDecember 31, 2018 . Figure 35 in the section entitled "Fourth Quarter Results" shows per Common Share earnings and dividends paid by quarter for each of the last two years. Figure 22 shows activities that caused the change in our outstanding Common Shares over the past two years. Figure 22. Changes in Common Shares Outstanding 2019 Quarters in thousands 2019 Fourth Third Second First 2018 Shares outstanding at beginning of period 1,019,503 988,538 1,003,114 1,013,186 1,019,503 1,069,084 Common Shares repurchased (50,247 ) (12,968 ) (15,076 ) (10,412 ) (11,791 ) (56,292 ) Shares reissued (returned) under employee benefit plans 7,933 1,619 500 340 5,474 6,711 Shares outstanding at end of period 977,189 977,189 988,538 1,003,114 1,013,186 1,019,503 During 2019, Common Shares outstanding decreased by 42.3 million shares due to Common Share repurchases under our 2018 and 2019 capital plans. AtDecember 31, 2019 , we had 279.5 million treasury shares, compared to 237.2 million treasury shares atDecember 31, 2018 . Going forward, we expect to reissue treasury shares as needed in connection with stock-based compensation awards and for other corporate purposes. Capital adequacy Capital adequacy is an important indicator of financial stability and performance. All of our capital ratios remained in excess of regulatory requirements atDecember 31, 2019 . Our capital and liquidity levels are intended to position us to weather an adverse operating environment while continuing to serve our clients' needs, as well as to meet the Regulatory Capital Rules described in the "Supervision and regulation" section of Item 1 of this report. Our shareholders' equity to assets ratio was 11.75% atDecember 31, 2019 , compared to 11.17% atDecember 31, 2018 . Our tangible common equity to tangible assets ratio was 8.64% atDecember 31, 2019 , compared to 8.30% atDecember 31, 2018 . The new minimum capital and leverage ratios under theRegulatory Capital Rules together with the estimated ratios ofKeyCorp atDecember 31, 2019 , calculated on a fully phased-in basis, are set forth under the heading "Basel III" in the "Supervision and Regulation" section in Item 1 of this report. 62
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Figure 23 represents the details of our regulatory capital positions at
Figure 23. Capital Components and Risk-Weighted Assets
December 31 ,
dollars in millions 2019 2018
COMMON EQUITY TIER 1 Key shareholders' equity (GAAP)$ 17,038 $
15,595
Less: Preferred Stock (a) 1,856
1,421
Common Equity Tier 1 capital before adjustments and
deductions 15,182 14,174
Less: Goodwill, net of deferred taxes 2,584 2,455
Intangible assets, net of deferred taxes 207 250
Deferred tax assets 9 9
Net unrealized gains (losses) on available-for-sale
securities, net of deferred taxes 115 (372 )
Accumulated gains (losses) on cash flow hedges, net
of deferred taxes 250 (78 )
Amounts in AOCI attributed to pension and
postretirement benefit costs, net of deferred taxes (339 ) (381 )
Total Common Equity Tier 1 capital 12,356 12,291
TIER 1 CAPITAL
Common Equity Tier 1 12,356 12,291
Additional Tier 1 capital instruments and related surplus 1,856
1,421
Less: Deductions - -
Total Tier 1 capital 14,212 13,712
TIER 2 CAPITAL
Tier 2 capital instruments and related surplus 1,546 1,279
Allowance for losses on loans and liability for losses on lending-related commitments (b)
978 962
Less: Deductions - -
Total Tier 2 capital 2,524 2,241
Total risk-based capital $ 16,736 $ 15,953
RISK-WEIGHTED ASSETS
Risk-weighted assets on balance sheet $ 102,441 $ 98,232
Risk-weighted off-balance sheet exposure 27,303
24,593
Market risk-equivalent assets 1,121
963
Gross risk-weighted assets 130,865 123,788
Less: Excess allowance for loan and lease losses -
-
Net risk-weighted assets $ 130,865 $ 123,788
AVERAGE QUARTERLY TOTAL ASSETS$ 143,910 $ 138,689 CAPITAL RATIOS Tier 1 risk-based capital 10.86 % 11.08 % Total risk-based capital 12.79 12.89 Leverage (c) 9.88 9.89 Common Equity Tier 1 9.44 9.93 (a) Net of capital surplus.
(b) The ALLL included in Tier 2 capital is limited by regulation to 1.25% of the
institution's standardized total risk-weighted assets (excluding its
standardized market risk-weighted assets). The ALLL includes
sheet at
(c) This ratio is Tier 1 capital divided by average quarterly total assets as
defined by the
intangible and deferred tax assets, and (iii) other deductions from assets
for leverage capital purposes.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-balance sheet arrangements
We are party to various types of off-balance sheet arrangements, which could
lead to contingent liabilities or risks of loss that are not reflected on the
balance sheet.
Variable interest entities
In accordance with the applicable accounting guidance for consolidations, we
consolidate a VIE if we have: (i) a variable interest in the entity; (ii) the
power to direct activities of the VIE that most significantly impact the
entity's economic performance; and (iii) the obligation to absorb losses of the
entity or the right to receive benefits from the entity that could potentially
be significant to the VIE (i.e., we are considered to be the primary
beneficiary). Additional information regarding the nature of VIEs and our
involvement with them is included in Note 1 ("Summary of Significant Accounting
Policies") under the heading "Principles of Consolidation and Basis of
Presentation" and in Note 13 ("Variable Interest Entities").
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Commitments to extend credit or funding Loan commitments provide for financing on predetermined terms as long as the client continues to meet specified criteria. These commitments generally carry variable rates of interest and have fixed expiration dates or other termination clauses. We typically charge a fee for our loan commitments. Since a commitment may expire without resulting in a loan or being fully utilized, the total amount of an outstanding commitment may significantly exceed any related cash outlay. Further information about our loan commitments atDecember 31, 2019 , is presented in Note 22 ("Commitments, Contingent Liabilities, and Guarantees") under the heading "Commitments to Extend Credit or Funding." Figure 24 shows the remaining contractual amount of each class of commitment to extend credit or funding. For loan commitments and commercial letters of credit, this amount represents our maximum possible accounting loss on the unused commitment if the borrower were to draw upon the full amount of the commitment and subsequently default on payment for the total amount of the then outstanding loan. Other off-balance sheet arrangements Other off-balance sheet arrangements include financial instruments that do not meet the definition of a guarantee in accordance with the applicable accounting guidance, and other relationships, such as liquidity support provided to asset-backed commercial paper conduits, indemnification agreements and intercompany guarantees. Information about such arrangements is provided in Note 22 under the heading "Other Off-Balance Sheet Risk." Contractual obligations Figure 24 summarizes our significant contractual obligations, and lending-related and other off-balance sheet commitments atDecember 31, 2019 , by the specific time periods in which related payments are due or commitments expire. Figure 24. Contractual Obligations and Other Off-Balance Sheet Commitments December 31, 2019 After 1 After 3 in millions Within 1 through 3 through 5 After 5 year years years years Total Contractual obligations:(a) Deposits with no stated maturity$ 100,218 - - -$ 100,218 Time deposits of$100,000 or more 5,684$ 873 $ 31$ 10 6,598 Other time deposits 4,078 867 93 16 5,054 Federal funds purchased and securities sold under repurchase agreements 387 - - - 387 Bank notes and other short-term borrowings 705 - - - 705 Long-term debt 1,010 5,970 525 4,943 12,448 Noncancellable operating leases 149 259 189 278 875 Liability for unrecognized tax benefits 19 - - - 19 Purchase obligations (b) 200 225 94 18 537 Total$ 112,450 $ 8,194 $ 932 $ 5,265 $ 126,841 Lending-related and other off-balance sheet commitments: Commercial, including real estate$ 15,647 $ 14,480 $ 16,922 $ 1,235 $ 48,284 Home equity 436 800 618 8,091 9,945 Credit cards 6,560 - - - 6,560 Purchase cards 729 - - - 729 Commercial letters of credit 37 47 7 - 91 Principal investing commitments 20 1 - - 21 Tax credit investment commitments 547 - - - 547 Total$ 23,976 $ 15,328 $ 17,547 $ 9,326 $ 66,177
(a) Deposits and borrowings exclude interest.
(b) Includes purchase obligations for goods and services covered by
noncancellable contracts and contracts including cancellation fees.
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Guarantees
We are a guarantor in various agreements with third parties. As guarantor, we
may be contingently liable to make payments to the guaranteed party based on
changes in a specified interest rate, foreign exchange rate or other variable
(including the occurrence or nonoccurrence of a specified event). These
variables, known as underlyings, may be related to an asset or liability, or
another entity's failure to perform under a contract. Additional information
regarding these types of arrangements is presented in Note 22 ("Commitments,
Contingent Liabilities, and Guarantees") under the heading "Guarantees."
Risk Management
Overview
Like all financial services companies, we engage in business activities and
assume the related risks. The most significant risks we face are credit,
compliance, operational, liquidity, market, reputation, strategic, and model
risks. Our risk management activities are shown in the following chart, and we
manage such risks across the entire enterprise to maintain safety and soundness
and maximize profitability. Certain of these risks are defined and discussed in
greater detail in the remainder of this section.
[[Image Removed: riskcyclea03.jpg]]
Federal banking regulators continue to emphasize with financial institutions the
importance of relating capital management strategy to the level of risk at each
institution. We believe our internal risk management processes help us achieve
and maintain capital levels that are commensurate with our business activities
and risks, and conform to regulatory expectations. The table below depicts our
risk management hierarchy and associated responsibilities and activities of each
group.
[[Image Removed: riskmgmthierarchy2019revised.jpg]]
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Group Overview and Responsibilities Activities Board of -
-
Directors Oversight capacity Understands Key's risk philosophy
- -
Ensure Key's risks are managed in a Approves the risk appetite
manner that is not only effective -
and balanced, but also has a Inquires about risk practices
fiduciary duty to the shareholders -
Reviews the portfolio of risks
-
Compares the actual risks to the
risk appetite
-
Is apprised of significant risks,
both actual and emerging, and
determines whether management is
responding appropriately
-
Challenges management and ensures
accountability
Board of - -
Directors Oversight of financial statement Meets with management and approves
Audit integrity, regulatory and legal significant policies relating to
Committee requirements, independent auditors' the risk areas overseen by the
(a) qualifications and independence, Audit Committee
and the performance of the internal -
audit function and independent Receives reports on enterprise risk
auditors -
- Meets bi-monthly
Financial reporting, legal matters, -
and fraud risk Convenes to discuss the content of
our financial disclosures and
quarterly earnings releases
Board of - -
Directors Assist the Board in oversight of Reviews and provides oversight of
Risk strategies, policies, procedures, management's activities related to
Committee and practices relating to the the enterprise-wide risk management
(a) assessment and management of framework, which includes an annual
enterprise-wide risk, including review of the ERM Policy, including
credit, market, liquidity, model, the Risk Appetite Statement, and
operational, compliance, management and ERM reports
reputation, and strategic risks -
- Approves any materialchanges to
Assist the Board in overseeing the charter of the ERMCommittee
risks related to capital adequacy, and significant policies relating
capital planning, and capital to risk management, including
actions corporate risk tolerances for major
risk categories
ERM - -Committee Chaired by the Chief Executive Approves and manages the
Officer and comprising other senior risk-adjusted capitalframework we
level executives use to manage risks
-
Manage risk and ensure that the
corporate risk profile is managed
in a manner consistent with our
risk appetite
-
Oversees the ERM Program, which
encompasses our risk philosophy,
policy, framework, and governance
structure for the management of
risks across the entire company
Disclosure - -
Committee Includes representatives from each Convenes quarterly to discuss the
of the Three Lines of Defense content of our 10-Q and 10-K
-
Meets quarterly to review recent
internal and external events to
determine whether all appropriate
disclosures have been made in
reports filed with the SEC
Tier 2 - -Risk Include attendees from each of the Supports the ERM Committee by Governance Three Lines of Defense
identifying early warning events
Committees - and trends, escalating emerging
The First Line of Defense is the risks, and discussing
line of business primarily forward-looking assessments
responsible to accept, own,
proactively identify, monitor, and
manage risk
-
The Second Line of Defense
comprises Risk Management
representatives who provide
independent, centralized oversight
over all risk categories by
aggregating, analyzing, and
reporting risk information
-
Risk Review, our internal audit
function, provides the Third Line
of Defense. Its role is to provide
independent assessment and testing
of the effectiveness of,
appropriateness of, and adherence
to KeyCorp's risk management
policies, practices, and controls
Chief Risk - -
Officer Ensure that relevant risk Provides input into performance and
information is properly integrated compensation decisions
into strategic and business -
decisions Assesses aggregate enterprise risk
- -
Ensure appropriate ownership of Monitors capabilities to manage
risks critical risks
-
Executes appropriate Board and
stakeholder reporting
(a) The Audit and Risk Committees meet jointly, as appropriate, to discuss
matters that relate to each committee's responsibilities. Committee
chairpersons routinely meet with management during interim months to plan
agendas for upcoming meetings and to discuss emerging trends and events that
have transpired since the preceding meeting. All members of the Board receive
formal reports designed to keep them abreast of significant developments
during the interim months.
Market risk management
Market risk is the risk that movements in market risk factors, including
interest rates, foreign exchange rates, equity prices, commodity prices, credit
spreads, and volatilities will reduce Key's income and the value of its
portfolios. These factors influence prospective yields, values, or prices
associated with the instrument. We are exposed to market risk both in our
trading and nontrading activities, which include asset and liability management
activities. Information regarding our fair value policies, procedures, and
methodologies is provided in Note 1 ("Summary of Significant Accounting
Policies") under the heading "Fair Value Measurements" and Note 6 ("Fair Value
Measurements") in this report.
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Trading market risk
Key incurs market risk as a result of trading activities that are used in support of client facilitation and hedging activities, principally within our investment banking and capital markets businesses. Key has exposures to a wide range of risk factors including interest rates, equity prices, foreign exchange rates, credit spreads, and commodity prices, as well as the associated implied volatilities and spreads. Our primary market risk exposures are a result of trading and hedging activities in the derivative and fixed income markets, including securitization exposures. AtDecember 31, 2019 , we did not have any re-securitization positions. We maintain modest trading inventories to facilitate customer flow, make markets in securities, and hedge certain risks including but not limited to credit risk and interest rate risk. The risks associated with these activities are mitigated in accordance with the Market Risk hedging policy. The majority of our positions are traded in active markets. Management of trading market risks. Market risk management is an integral part of Key's risk culture. The Risk Committee of our Board provides oversight of trading market risks. The ERM Committee and the Market Risk Committee regularly review and discuss market risk reports prepared by our MRM that contain our market risk exposures and results of monitoring activities. Market risk policies and procedures have been defined and approved by the Market Risk Committee, a Tier 2 Risk Governance Committee, and take into account our tolerance for risk and consideration for the business environment. The MRM, as the second line of defense, is an independent risk management function that partners with the lines of business to identify, measure, and monitor market risks throughout our company. The MRM is responsible for ensuring transparency of significant market risks, monitoring compliance with established limits, and escalating limit exceptions to appropriate senior management. The various business units and trading desks are responsible for ensuring that market risk exposures are well-managed and prudent. Market risk is monitored through various measures, such as VaR, and through routine stress testing, sensitivity, and scenario analyses. The MRM conducts stress tests for each position using historical worst case and standard shock scenarios. VaR, stressed VaR, and other analyses are prepared daily and distributed to appropriate management. Covered positions. We monitor the market risk of our covered positions as defined in the Market Risk Rule, which includes all of our trading positions as well as all foreign exchange and commodity positions, regardless of whether the position is in a trading account. Key's covered positions may also include mortgage-backed and asset-backed securities that may be identified as securitization positions or re-securitization positions under the Market Risk Rule. The MRM as well as the LOB that trades securitization positions monitor the positions, the portfolio composition and the risks identified in this section on a daily basis consistent with the Market Risk policies and procedures. AtDecember 31, 2019 , covered positions did not include any re-securitization positions. Instruments that are used to hedge nontrading activities, such as bank-issued debt and loan portfolios, equity positions that are not actively traded, and securities financing activities, do not meet the definition of a covered position. The MRM is responsible for identifying our portfolios as either covered or non-covered.The Covered Position Working Group develops the final list of covered positions, and a summary is provided to the Market Risk Committee. Our significant portfolios of covered positions are detailed below. We analyze market risk by portfolios of covered positions and do not separately measure and monitor our portfolios by risk type. The descriptions below incorporate the respective risk types associated with each of these portfolios.
• Fixed income includes those instruments associated with our capital markets
business and the trading of securities as a dealer. These instruments may
include positions in municipal bonds, bonds backed by the
agency and corporate bonds, certain mortgage-backed and asset-backed
securities, securities issued by the U.S. Treasury , money markets, and
certain CMOs. The activities and instruments within the fixed income
portfolio create exposures to interest rate and credit spread risks.
• Interest rate derivatives include interest rate swaps, caps, and floors,
which are transacted primarily to accommodate the needs of commercial loan
clients. In addition, we enter into interest rate derivatives to offset or
mitigate the interest rate risk related to the client positions. The
activities within this portfolio create exposures to interest rate risk.
VaR and stressed VaR. VaR is the estimate of the maximum amount of loss on an
instrument or portfolio due to adverse market conditions during a given time
interval within a stated confidence level. Stressed VaR is used to assess
extreme conditions on market risk within our trading portfolios. The MRM
calculates VaR and stressed VaR on a daily basis, and the results are
distributed to appropriate management. VaR and stressed VaR results are also
provided to our regulators and utilized in regulatory capital calculations.
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We use a historical simulation VaR model to measure the potential adverse effect of changes in interest rates, foreign exchange rates, equity prices, and credit spreads on the fair value of our covered positions and other non-covered positions. Historical scenarios are customized for specific positions, and numerous risk factors are incorporated in the calculation. Additional consideration is given to the risk factors to estimate the exposures that contain optionality features, such as options and cancelable provisions. VaR is calculated using daily observations over a one-year time horizon, and approximates a 95% confidence level. Statistically, this means that we would expect to incur losses greater than VaR, on average, five out of 100 trading days, or three to four times each quarter. We also calculate VaR and stressed VaR at a 99% confidence level. The VaR model is an effective tool in estimating ranges of possible gains and losses on our positions. However, there are limitations inherent in the VaR model since it uses historical results over a given time interval to estimate future performance. Historical results may not be indicative of future results, and changes in the market or composition of our portfolios could have a significant impact on the accuracy of the VaR model. We regularly review and enhance the modeling techniques, inputs, and assumptions used. Our market risk policy includes the independent validation of our VaR model by Key's internal model validation group on an annual basis. The Model Risk Committee oversees the Model Validation Program, and results of validations are discussed with the ERM Committee. Actual losses for the total covered positions did not exceed aggregate daily VaR on any day during the quarters endedDecember 31, 2019 , andDecember 31, 2018 . The MRM backtests our VaR model on a daily basis to evaluate its predictive power. The test compares VaR model results at the 99% confidence level to daily held profit and loss. Results of backtesting are provided to the Market Risk Committee. Backtesting exceptions occur when trading losses exceed VaR. We do not engage in correlation trading or utilize the internal model approach for measuring default and credit migration risk. Our net VaR approach incorporates diversification, but our VaR calculation does not include the impact of counterparty risk and our own credit spreads on derivatives. The aggregate VaR at the 99% confidence level with a one day holding period for all covered positions was$.9 million atDecember 31, 2019 , and$.8 million atDecember 31, 2018 . Figure 25 summarizes our VaR at the 99% confidence level with a one day holding period for significant portfolios of covered positions for the three months endedDecember 31, 2019 , andDecember 31, 2018 . Figure 25. VaR for Significant Portfolios of Covered Positions 2019 2018 Three months ended December 31, Three months ended December 31, in millions High Low Mean December 31, High Low Mean December 31, Trading account assets: Fixed income $ 1.2$ .6 $ .9 $ .8 $ .8$ .3 $ .6 $ .6 Derivatives: Interest rate $ .1 .1$ .1 $ .1 $ .2 .1$ .1 $ .1 Stressed VaR is calculated by running the portfolios through a predetermined stress period which is approved by the Market Risk Committee and is calculated at the 99% confidence level using the same model and assumptions used for general VaR. The aggregate stressed VaR for all covered positions was$5.1 million atDecember 31, 2019 , and atDecember 31, 2018 . Figure 26 summarizes our stressed VaR at the 99% confidence level with a one day holding period for significant portfolios of covered positions for the three months endedDecember 31, 2019 , andDecember 31, 2018 . Figure 26. Stressed VaR for Significant Portfolios of Covered Positions 2019 2018 Three months ended December 31, Three months ended December 31, in millions High Low Mean December 31, High Low Mean December 31, Trading account assets: Fixed income$ 5.7 $ 3.2 $ 4.5 $ 4.3$ 5.6 $ 3.6 $ 4.6 $ 3.9 Derivatives: Interest rate$ 1.2 $ .2 $ .4 $ .7 $ .9$ .5 $ .6 $ .6
Internal capital adequacy assessment. Market risk is a component of our internal capital adequacy assessment. Our risk-weighted assets include a market risk-equivalent asset amount, which consists of a VaR
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component, stressed VaR component, a de minimis exposure amount, and a specific risk add-on including the securitization positions. The aggregate market value of the securitization positions as defined by the Market Risk Rule was$44.9 million atDecember 31, 2019 . This amount included$16.3 million of mortgage-backed securities positions and$28.6 million of asset-backed securities positions. Specific risk is the price risk of individual financial instruments, which is not accounted for by changes in broad market risk factors and is measured through a standardized approach. Market risk weighted assets, including the specific risk calculations, are run quarterly by the MRM in accordance with the Market Risk Rule and approved by the Chief Market Risk Officer.
Nontrading market risk
Most of our nontrading market risk is derived from interest rate fluctuations and its impacts on our traditional loan and deposit products, as well as investments, hedging relationships, long-term debt, and certain short-term borrowings. Interest rate risk, which is inherent in the banking industry, is measured by the potential for fluctuations in net interest income and the EVE. Such fluctuations may result from changes in interest rates and differences in the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. We manage the exposure to changes in net interest income and the EVE in accordance with our risk appetite and in accordance with the Board approved ERM policy. Interest rate risk positions are influenced by a number of factors, including the balance sheet positioning that arises out of customer preferences for loan and deposit products, economic conditions, the competitive environment within our markets, changes in market interest rates that affect client activity, and our hedging, investing, funding, and capital positions. The primary components of interest rate risk exposure consist of reprice risk, basis risk, yield curve risk, and option risk.
• "Reprice risk" is the exposure to changes in the level of interest rates and
occurs when the volume of interest-bearing liabilities and the volume of
interest-earning assets they fund (e.g., deposits used to fund loans) do not
mature or reprice at the same time.
• "Basis risk" is the exposure to asymmetrical changes in interest rate indexes
and occurs when floating-rate assets and floating-rate liabilities reprice at
the same time, but in response to different market factors or indexes.
• "Yield curve risk" is the exposure to non-parallel changes in the slope of
the yield curve (where the yield curve depicts the relationship between the
yield on a particular type of security and its term to maturity) and occurs
when interest-bearing liabilities and the interest-earning assets that they
fund do not price or reprice to the same term point on the yield curve.
• "Option risk" is the exposure to a customer or counterparty's ability to take
advantage of the interest rate environment and terminate or reprice one of
our assets, liabilities, or off-balance sheet instruments prior to
contractual maturity without a penalty. Option risk occurs when exposures to
customer and counterparty early withdrawals or prepayments are not mitigated
with an offsetting position or appropriate compensation.
The management of nontrading market risk is centralized within CorporateTreasury . The Risk Committee of our Board provides oversight of nontrading market risk. The ERM Committee and theALCO review reports on the interest rate risk exposures described above. In addition, theALCO 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 theALCO . The MRM, as the second line of defense, provides additional oversight. Net interest income simulation analysis. The primary tool we use to measure our interest rate risk is simulation analysis. For purposes of this analysis, we estimate our net interest income based on the current and projected composition of our on- and off-balance sheet positions, accounting for recent and anticipated trends in customer activity. The analysis also incorporates assumptions for the current and projected interest rate environments and balance sheet growth projections based on a most likely macroeconomic view. The results of this simulation analysis reflect management's desired interest rate risk positioning. The modeling incorporates investment portfolio and swap portfolio balances consistent with management's desired interest rate risk positioning. The simulation model estimates the amount of net interest income at risk by simulating the change in net interest income that would occur if rates were to gradually increase or decrease over the next 12 months (subject to a 25 basis point floor in rates). 69
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Figure 27 presents the results of the simulation analysis atDecember 31, 2019 , andDecember 31, 2018 . AtDecember 31, 2019 , our simulated impact to changes in interest rates was modest. The asset sensitive position declined from 2018 as a result of hedging actions executed to guide the position closer to neutral over time. Tolerance levels for risk management require the development of remediation plans to maintain residual risk within tolerance if simulation modeling demonstrates that a gradual, parallel 200 basis point increase or 200 basis point decrease (subject to a 25 basis point floor in rates) in interest rates over the next 12 months would adversely affect net interest income over the same period by more than 5.5%. Current modeled exposure is within Board approved tolerances. Figure 27. Simulated Change in Net Interest Income December 31, 2019 December 31, 2018 Basis point change assumption (short-term rates) -150 +200 -200 +200 Tolerance level -5.50 % -5.50 % -5.50 % -5.50 % Interest rate risk assessment -2.47 % -1.45 %
-4.89 % 2.22 %
Simulation analysis produces a sophisticated estimate of interest rate exposure based on assumptions input into the model. We tailor certain assumptions to the specific interest rate environment and yield curve shape being modeled and validate those assumptions on a regular basis. However, actual results may differ from those derived in simulation analysis due to unanticipated changes to the balance sheet composition, customer behavior, product pricing, market interest rates, changes in management's desired interest rate risk positioning, investment, funding and hedging activities, and repercussions from unanticipated or unknown events. We also perform regular stress tests and sensitivity analyses on the model inputs that could materially change the resulting risk assessments. Assessments are performed using different shapes of the yield curve, including steepening or flattening of the yield curve, immediate changes in market interest rates, and changes in the relationship of money market interest rates. Assessments are also performed on changes to the following assumptions: loan and deposit balances, the pricing of deposits without contractual maturities, changes in lending spreads, prepayments on loans and securities, investment, funding and hedging activities, and liquidity and capital management strategies. The results of additional assessments indicate that net interest income could increase or decrease from the base simulation results presented in Figure 27. Net interest income is highly dependent on the timing, magnitude, frequency, and path of interest rate increases and the associated assumptions for deposit repricing relationships, lending spreads, and the balance behavior of transaction accounts. If fixed rate assets increase by$1 billion , or fixed rate liabilities decrease by$1 billion , then the benefit to rising rates would decrease by approximately 25 basis points. If the interest-bearing liquid deposit beta assumption increases or decreases by 5% (e.g., 40% to 45%), then the benefit to rising rates would decrease or increase by approximately 95 basis points. Our current interest rate risk position could fluctuate to higher or lower levels of risk depending on the competitive environment and client behavior that may affect the actual volume, mix, maturity, and repricing characteristics of loan and deposit flows. CorporateTreasury discretionary activities related to funding, investing, and hedging may also change as a result of changes in customer business flows or changes in management's desired interest rate risk positioning. As changes occur to both the configuration of the balance sheet and the outlook for the economy, management proactively evaluates hedging opportunities that may change our interest rate risk profile.
We also conduct simulations that measure the effect of changes in market interest rates in the second and third years of a three-year horizon. These simulations are conducted in a manner similar to those based on a 12-month horizon. To capture longer-term exposures, we calculate exposures to changes of the EVE as discussed in the following section.
Economic value of equity modeling. EVE complements net interest income
simulation analysis as it estimates risk exposure beyond 12-, 24-, and 36-month
horizons. EVE modeling measures the extent to which the economic values of
assets, liabilities, and off-balance sheet instruments may change in response to
fluctuations in interest rates. EVE is calculated by subjecting the balance
sheet to an immediate 200 basis point increase or decrease in interest rates,
measuring the resulting change in the values of assets, liabilities, and
off-balance sheet instruments, and comparing those amounts with the base case of
the current interest rate environment. This analysis is highly dependent upon
assumptions applied to assets and liabilities with non-contractual maturities.
Those assumptions are based on historical behaviors, as well as our
expectations. We develop remediation plans that would maintain
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residual risk within tolerance if this analysis indicates that our EVE will
decrease by more than 15% in response to an immediate increase or decrease in
interest rates. We are operating within these guidelines as of
Management of interest rate exposure. We use the results of our various interest
rate risk analyses to formulate A/LM strategies to achieve the desired risk
profile while managing to our objectives for capital adequacy and liquidity risk
exposures. Specifically, we manage interest rate risk positions by purchasing
securities, issuing term debt with floating or fixed interest rates, and using
derivatives. We predominantly use interest rate swaps and options, which modify
the interest rate characteristics of certain assets and liabilities.
Figure 28 shows all derivative positions that we hold for A/LM purposes. The
swap positions are used to convert the contractual interest rate index of
agreed-upon amounts of assets and liabilities (i.e., notional amounts) to
another interest rate index. For example, fixed-rate debt is converted to a
floating rate through a "receive fixed/pay variable" interest rate swap. The
volume, maturity, and mix of portfolio swaps change frequently as we adjust our
broader A/LM objectives and the balance sheet positions to be hedged. For more
information about how we use interest rate swaps to manage our risk profile, see
Note 8 ("Derivatives and Hedging Activities").
Figure 28. Portfolio Swaps and Options by Interest Rate Risk Management Strategy
December 31, 2019
Weighted-Average December 31, 2018
Notional Fair Maturity Receive Pay Notional Fair
dollars in millions Amount Value (Years) Rate Rate Amount Value
Receive fixed/pay
variable - conventional
A/LM (a) $ 19,270 $ 312 2.1 2.3 % 1.7 % $ 10,720 $ (87 )
Receive fixed/pay
variable - conventional
debt 8,189 240 3.2 2.2 1.7 9,923 (7 )
Receive fixed/pay
variable - forward A/LM 3,400 32 1.9 1.9 1.8 3,050 45
Pay fixed/receive
variable - conventional
debt 50 (7 ) 8.5 2.1 3.6 50 (4 )
Total portfolio swaps $ 30,909 $ 577 (c) 2.4 2.2 % 1.7 % $ 23,743 $ (53 ) (c)
Floors - conventional
A/LM - purchased (b) $ 4,200 $ 149 2.0 - - $ 4,760 -
Floors - conventional
A/LM - sold (b) 3,900 (15 ) 2.0 - - - -
Total floors $ 8,100 $ 134 2.0 - - $ 4,760 -
(a) Portfolio swaps designated as A/LM are used to manage interest rate risk tied
to both assets and liabilities.
(b) Conventional A/LM floors do not have a stated receive rate or pay rate and
are given a strike price on the option.
(c) Excludes accrued interest of
2019, and
Liquidity risk management Liquidity risk, which is inherent in the banking industry, is measured by our ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund new business opportunities at a reasonable cost, in a timely manner, and without adverse consequences. Liquidity management involves maintaining sufficient and diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets and liabilities under both normal and adverse conditions. Governance structure We manage liquidity for all of our affiliates on an integrated basis. This approach considers the unique funding sources available to each entity, as well as each entity's capacity to manage through adverse conditions. The approach also recognizes that adverse market conditions or other events that could negatively affect the availability or cost of liquidity will affect the access of all affiliates to sufficient wholesale funding. The management of consolidated liquidity risk is centralized within CorporateTreasury . Oversight and governance is provided by the Board, the ERM Committee, theALCO , and the Chief Risk Officer. The Asset Liability Management Policy provides the framework for the oversight and management of liquidity risk and is administered by theALCO . The Corporate Treasury Oversight group within the MRM, as the second line of defense, provides additional oversight. Our current liquidity risk management practices are in compliance with theFederal Reserve Board's Enhanced Prudential Standards. These committees regularly review liquidity and funding summaries, liquidity trends, peer comparisons, variance analyses, liquidity projections, hypothetical funding erosion stress tests, and goal tracking reports. The reviews generate a discussion of positions, trends, and directives on liquidity risk and shape a number of our decisions. When liquidity pressure is elevated, positions are monitored more closely and reporting is more intensive. To ensure 71
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that emerging issues are identified, we also communicate with individuals inside and outside of the company on a daily basis. Factors affecting liquidity Our liquidity could be adversely affected by both direct and indirect events. An example of a direct event would be a downgrade in our public credit ratings by a rating agency. Examples of indirect events (events unrelated to us) that could impair our access to liquidity would be an act of terrorism or war, natural disasters, global pandemics, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation, or rumors about us or the banking industry in general, may adversely affect the cost and availability of normal funding sources. Our credit ratings atDecember 31, 2019 , are shown in Figure 29. We believe these credit ratings, under normal conditions in the capital markets, will enableKeyCorp orKeyBank to issue fixed income securities to investors. Figure 29. Credit Ratings Senior Subordinated Short-Term Long-Term Long-Term Long-Term Capital Preferred December 31, 2019 Borrowings Deposits Debt Debt Securities StockKEYCORP (THE PARENT COMPANY ) Standard & Poor's A-2 N/A BBB+ BBB BB+ BB+ Moody's P-2 N/A Baa1 Baa1 Baa2 Baa3 Fitch F1 N/A A- BBB+ BB+ BB DBRS R-1(low) N/A A A (low) A (low) BBB KEYBANK Standard & Poor's A-2 N/A A- BBB+ N/A N/A Moody's P-2 Aa3 A3 Baa1 N/A N/A Fitch F1 A A- BBB+ N/A N/A DBRS R-1(middle) A (high) A (high) A N/A N/A Managing liquidity risk Most of our liquidity risk is derived from our lending activities, which inherently places funds into illiquid assets. Liquidity risk is also derived from our deposit gathering activities and the ability of our customers to withdraw funds that do not have a stated maturity or to withdraw funds before their contractual maturity. The assessments of liquidity risk are measured under the assumption of normal operating conditions as well as under a stressed environment. We manage these exposures in accordance with our risk appetite, and within Board-approved policy limits. We regularly monitor our liquidity position and funding sources and measure our capacity to obtain funds in a variety of hypothetical scenarios in an effort to maintain an appropriate mix of available and affordable funding. In the normal course of business, we perform a monthly hypothetical funding erosion stress test for bothKeyCorp andKeyBank . In a "heightened monitoring mode," we may conduct the hypothetical funding erosion stress tests more frequently, and use assumptions to reflect the changed market environment. Our testing incorporates estimates for loan and deposit lives based on our historical studies. Erosion stress tests analyze potential liquidity scenarios under various funding constraints and time periods. Ultimately, they determine the periodic effects that major direct and indirect events would have on our access to funding markets and our ability to fund our normal operations. To compensate for the effect of these assumed liquidity pressures, we consider alternative sources of liquidity and maturities over different time periods to project how funding needs would be managed. We maintain a Contingency Funding Plan that outlines the process for addressing a liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for managing liquidity through a problem period. As part of the plan, we maintain on-balance sheet liquid reserves referred to as our liquid asset portfolio, which consists of high quality liquid assets. During a problem period, that reserve could be used as a source of funding to provide time to develop and execute a longer-term strategy. The liquid asset portfolio atDecember 31, 2019 , totaled$25.2 billion , consisting of$24.0 billion of unpledged securities,$140 million of securities available for secured funding at the FHLB, and$1.1 billion of net balances of federal funds sold and balances in ourFederal Reserve account. The liquid asset portfolio can fluctuate due to excess liquidity, heightened risk, or prefunding of expected outflows, such as debt maturities. Additionally, as ofDecember 31, 2019 , our unused borrowing capacity secured by loan collateral was$25.2 billion at the Federal 72
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ReserveBank of Cleveland and$8.0 billion at the FHLB ofCincinnati . In 2019, Key's outstanding FHLB ofCincinnati advances decreased by$1.0 billion due to paydowns. Long-term liquidity strategy Our long-term liquidity strategy is to be predominantly funded by core deposits. However, we may use wholesale funds to sustain an adequate liquid asset portfolio, meet daily cash demands, and allow management flexibility to execute business initiatives. Key's client-based relationship strategy provides for a strong core deposit base that, in conjunction with intermediate and long-term wholesale funds managed to a diversified maturity structure and investor base, supports our liquidity risk management strategy. We use the loan-to-deposit ratio as a metric to monitor these strategies. Our target loan-to-deposit ratio is 90-100% (atDecember 31, 2019 , our loan-to-deposit ratio was 87%), which we calculate as the sum of total loans, loans held for sale, and nonsecuritized discontinued loans divided by deposits. Sources of liquidity Our primary sources of liquidity include customer deposits, wholesale funding, and liquid assets. If the cash flows needed to support operating and investing activities are not satisfied by deposit balances, we rely on wholesale funding or on-balance sheet liquid reserves. Conversely, excess cash generated by operating, investing, and deposit-gathering activities may be used to repay outstanding debt or invest in liquid assets.
Liquidity programs
We have several liquidity programs, which are described in Note 20 ("Long-Term
Debt"), that are designed to enable KeyCorp and KeyBank to raise funds in the
public and private debt markets. The proceeds from most of these programs can be
used for general corporate purposes, including acquisitions. These liquidity
programs are reviewed from time to time by the Board and are renewed and
replaced as necessary. There are no restrictive financial covenants in any of
these programs.
On
Liquidity for
The primary source of liquidity forKeyCorp is from subsidiary dividends, primarily fromKeyBank .KeyCorp has sufficient liquidity when it can service its debt; support customary corporate operations and activities (including acquisitions); support occasional guarantees of subsidiaries' obligations in transactions with third parties at a reasonable cost, in a timely manner, and without adverse consequences; and fund capital distributions in the form of dividends and share buybacks. We use a parent cash coverage months metric as the primary measure to assess parent company liquidity. The parent cash coverage months metric measures the number of months into the future where projected obligations can be met with the current quantity of liquidity. We generally issue term debt to supplement dividends fromKeyBank to manage our liquidity position at or above our targeted levels. The parent company generally maintains cash and short-term investments in an amount sufficient to meet projected debt maturities over at least the next 24 months. AtDecember 31, 2019 ,KeyCorp held$3.8 billion in cash, which we projected to be sufficient to meet our projected obligations, including the repayment of our maturing debt obligations for the periods prescribed by our risk tolerance. Typically,KeyCorp meets its liquidity requirements through regular dividends fromKeyBank , supplemented with term debt. Federal banking law limits the amount of capital distributions that a bank can make to its holding company without prior regulatory approval. A national bank's dividend-paying capacity is affected by several factors, including net profits (as defined by statute) for the two previous calendar years and for the current year, up to the date of dividend declaration. During 2019,KeyBank paid$1.2 billion in cash dividends toKeyCorp . AtJanuary 1, 2020 ,KeyBank had regulatory capacity to pay$920 million in dividends toKeyCorp without prior regulatory approval.
On
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On
On
OnFebruary 6, 2020 ,KeyCorp issued$800 million of 2.250% Senior Notes dueApril 6, 2027 , under its Medium-Term Note Program. Our liquidity position and recent activity Over the past 12 months, our liquid asset portfolio, which includes overnight and short-term investments, as well as unencumbered, high quality liquid securities held as protection against a range of potential liquidity stress scenarios, has increased as a result of an increase in unpledged securities, partially offset by lower balances held at theFederal Reserve . The liquid asset portfolio continues to exceed the amount that we estimate would be necessary to manage through an adverse liquidity event by providing sufficient time to develop and execute a longer-term solution. From time to time,KeyCorp orKeyBank 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 byKeyCorp is included in Part II, Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities of this report. Such transactions depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, regulatory requirements, and other factors. The amounts involved may be material, individually or collectively. The Consolidated Statements of Cash Flows summarize our sources and uses of cash by type of activity for the years endedDecember 31, 2019 , andDecember 31, 2018 . Credit risk management Credit risk is the risk of loss to us arising from an obligor's inability or failure to meet contractual payment or performance terms. Like other financial services institutions, we make loans, extend credit, purchase securities, add financial and payments products, and enter into financial derivative contracts, all of which have related credit risk. Credit policy, approval, and evaluation We manage credit risk exposure through a multifaceted program. The Credit Risk Committee approves management credit policies and recommends significant credit policies to the Enterprise Risk Management Committee, the KeyBank Board, and the Risk Committee of the Board for approval. These policies are communicated throughout the organization to foster a consistent approach to granting credit. Our credit risk management team and certain individuals within our lines of business, to whom credit risk management has delegated limited credit authority, are responsible for credit approval. Individuals with assigned credit authority are authorized to grant exceptions to credit policies. It is not unusual to make exceptions to established policies when mitigating circumstances dictate, however, a corporate level tolerance has been established to keep exceptions at an acceptable level based upon portfolio and economic considerations. Our credit risk management team uses risk models to evaluate consumer loans. These models, known as scorecards, forecast the probability of serious delinquency and default for an applicant. The scorecards are embedded in the application processing system, which allows for real-time scoring and automated decisions for many of our products. We periodically validate the loan grading and scoring processes. We maintain an active concentration management program to mitigate concentration risk in our credit portfolios. For individual obligors, we employ a sliding scale of exposure, known as hold limits, which is dictated by the type of loan and strength of the borrower. 74
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Allowance for loan and lease losses
We estimate the appropriate level of the ALLL on at least a quarterly basis. The
methodology used is described in Note 1 ("Summary of Significant Accounting
Policies") under the heading "Allowance for Loan and Lease Losses." Briefly, our
allowance applies incurred loss rates to existing loans with similar risk
characteristics. We exercise judgment to assess any adjustment to the incurred
loss rates for the impact of factors such as changes in economic conditions,
lending policies including underwriting standards, and the level of credit risk
associated with specific industries and markets. As described in Note 1,
("Summary of Significant Accounting Policies"), on January 1, 2020 , we adopted
ASC 326, Financial Instruments - Credit Losses, and as such, an expected credit
loss methodology, specifically current expected credit losses for the remaining
life of our loans and leases, will be used to estimate the appropriate level of
the ALLL. The ALLL at December 31, 2019 , represents our best estimate of the
probable credit losses inherent in the loan portfolio at that date. For more
information about impaired loans, see Note 5 ("Asset Quality").
As shown in Figure 30, our ALLL from continuing operations increased by $17
million , or 1.9%, from December 31, 2018 . Our commercial ALLL increased by $8
million , or 1.1%, from December 31, 2018 , primarily due to loan growth over the
period and risk rating migration. Our consumer ALLL increased by $9 million , or
6.4%, from December 31, 2018 . The consumer ALLL increase was primarily due to
loan growth and modest shifts in credit quality metrics.
Figure 30. Allocation of the Allowance for Loan and Lease Losses
2019 2018 2017
Percent of Percent of Percent of Percent of Percent of Percent of
Allowance Loan Type Allowance Loan Type Allowance Loan Type
December 31, Total to Total to Total Total to Total to Total Total to Total to Total
dollars in millions Allowance Allowance Loans Allowance Allowance Loans Allowance Allowance Loans
Commercial and industrial $ 551 61.2 % 51.0 % $ 532 60.2 % 51.1 % $ 529 60.3 % 48.4 %
Commercial real estate:
Commercial mortgage 143 15.9 14.3 142 16.1 15.9 133 15.2 16.3
Construction 22 2.4 1.6 33 3.8 1.9 30 3.4 2.3
Total commercial real
estate loans 165 18.3 15.9 175 19.9 17.8 163 18.6 18.6
Commercial lease financing 35 3.9 5.0 36 4.1 5.1 43 4.9 5.6
Total commercial loans 751 83.4 71.9 743 84.2 74.0 735 83.8 72.6
Real estate - residential
mortgage 7 .8 7.4 7 .8 6.2 7 0.8 6.3
Home equity loans 31 3.5 10.9 35 3.9 12.4 43 4.9 13.9
Consumer direct loans 34 3.8 3.7 30 3.4 2.0 28 3.2 2.1
Credit cards 47 5.2 1.2 48 5.4 1.3 44 5.0 1.3
Consumer indirect loans 30 3.3 4.9 20 2.3 4.1 20 2.3 3.8
Total consumer loans 149 16.6 28.1 140 15.8 26.0 142 16.2 27.4
Total loans (a) $ 900 100.0 % 100.0 % $ 883 100.0 % 100.0 % $ 877 100.0 % 100.0 %
2016 2015
Percent of Percent of Percent of Percent of
Allowance Loan Type Allowance Loan Type
Total to Total to Total Total to Total to Total
Allowance Allowance Loans Allowance Allowance Loans
Commercial and industrial $ 508 59.2 % 46.2 % $ 450 56.5 % 52.2 %
Commercial real estate:
Commercial mortgage 144 16.8 17.6 134 16.8 13.3
Construction 22 2.6 2.7 25 3.2 1.7
Total commercial real
estate loans 166 19.4 20.3 159 20.0 15.0
Commercial lease financing 42 4.9 5.4 47 5.9 6.7
Total commercial loans 716 83.5 71.9 656 82.4 73.9
Real estate - residential
mortgage 17 2.0 6.5 18 2.3 3.7
Home equity loans 54 6.3 14.7 57 7.2 17.3
Consumer direct loans 24 2.8 2.1 20 2.5 2.7
Credit cards 38 4.4 1.3 32 4.0 1.3
Consumer indirect loans 9 1.0 3.5 13 1.6 1.1
Total consumer loans 142 16.5 28.1 140 17.6 26.1
Total loans (a) $ 858 100.0 % 100.0 % $ 796 100.0 % 100.0 %
(a) Excludes allocations of the ALLL related to the discontinued operations of
the education lending business in the amount of
2019,
million at
Net loan charge-offs
Figure 31 shows the trend in our net loan charge-offs by loan type, while the
composition of loan charge-offs and recoveries by type of loan is presented in
Figure 32.
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Over the past 12 months, net loan charge-offs increased
Figure 31. Net Loan Charge-offs from Continuing Operations (a)
Year ended December 31 ,
dollars in millions 2019 2018 2017 2016 2015
Commercial and industrial $ 292 $ 122 $ 93 $ 107 $ 61
Real estate - commercial
mortgage 6 18 9 (4 ) (2 )
Real estate - construction 5 (2 ) 1 7 -
Commercial lease financing 21 5 8 9 4
Total commercial loans 324 143 111 119 63
Real estate - residential
mortgage 1 1 (1 ) 3 3
Home equity loans 11 10 15 16 21
Consumer direct loans 34 29 28 22 18
Credit cards 37 37 39 31 28
Consumer indirect loans 17 14 16 14 9
Total consumer loans 100 91 97 86 79
Total net loan charge-offs $ 424 $ 234 $ 208 $ 205 $ 142
Net loan charge-offs to average
loans .46 % .26 % .24 % .29 % .24 %
Net loan charge-offs from
discontinued operations -
education lending business $ 7 $ 10 $ 18 $ 17 $ 22 (a) Credit amounts indicate that recoveries exceeded charge-offs.
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Figure 32. Summary of Loan and Lease Loss Experience from Continuing Operations Year endedDecember 31 , dollars in millions 2019 2018 2017 2016 2015 Average loans outstanding$ 91,511 $ 88,338 $ 86,365
Allowance for loan and lease losses at beginning of period$ 883 $ 877 $ 858 $ 796 $ 794 Loans charged off: Commercial and industrial 319 159 133 118 77 Real estate - commercial mortgage 8 21 11 5 4 Real estate - construction 5 - 2 9 1 Total commercial real estate loans (a) 13 21 13 14 5 Commercial lease financing 26 10 14 12 11 Total commercial loans (b) 358 190 160 144 93 Real estate - residential mortgage 3 3 3 4 6 Home equity loans 19 21 30 30 32 Consumer direct loans 41 36 34 27 24 Credit cards 44 44 44 35 30 Consumer indirect loans 34 30 31 21 18 Total consumer loans 141 134 142 117 110 Total loans charged off 499 324 302 261 203 Recoveries: Commercial and industrial 27 37 40 11 16 Real estate - commercial mortgage 2 3 2 9 6 Real estate - construction - 2 1 2 1 Total commercial real estate loans (a) 2 5 3 11 7 Commercial lease financing 5 5 6 3 7 Total commercial loans (b) 34 47 49 25 30 Real estate - residential mortgage 2 2 4 1 3 Home equity loans 8 11 15 14 11 Consumer direct loans 7 7 6 5 6 Credit cards 7 7 5 4 2 Consumer indirect loans 17 16 15 7 9 Total consumer loans 41 43 45 31 31 Total recoveries 75 90 94 56 61 Net loan charge-offs (424 ) (234 ) (208 ) (205 ) (142 ) Provision (credit) for loan and lease losses 441 240 227 267 145 Foreign currency translation adjustment - - - - (1 ) Allowance for loan and lease losses at end of year$ 900 $ 883 $ 877 $ 858 $ 796 Liability for credit losses on lending-related commitments at beginning of the year$ 64 $ 57 $ 55 $ 56 $ 35 Provision (credit) for losses on lending-related commitments 4 6 2 (1 ) 21 Liability for credit losses on lending-related commitments at end of the year (c)$ 68 $ 63 $ 57 $ 55 $ 56 Total allowance for credit losses at end of the year$ 968 $ 946 $ 934 $ 913 $ 852 Net loan charge-offs to average total loans .46 % .26 % .24 % .29 % .24 % Allowance for loan and lease losses to period-end loans .95 .99 1.01 1.00 1.33 Allowance for credit losses to period-end loans 1.02 1.06 1.08 1.06 1.42 Allowance for loan and lease losses to nonperforming loans 156.0 162.9 174.4 137.3 205.7 Allowance for credit losses to nonperforming loans 167.8 174.5 185.7 146.1 220.2 Discontinued operations - education lending business: Loans charged off$ 12 $ 15 $ 26 $ 28 $ 35 Recoveries 5 5 8 11 13 Net loan charge-offs$ (7 ) $ (10 ) $ (18 ) $ (17 ) $ (22 )
(a) See Figure 12 and the accompanying discussion in the "Loans and loans held
for sale" section for more information related to our commercial real estate
loan portfolio.
(b) See Figure 11 and the accompanying discussion in the "Loans and loans held
for sale" section for more information related to our commercial loan
portfolio.
(c) Included in "accrued expense and other liabilities" on the balance sheet.
Nonperforming assets Figure 33 shows the composition of our nonperforming assets. As shown in Figure 33, nonperforming assets increased$138 million during 2019. The increase was primarily driven by the transfer of three criticized commercial loans as well as a number of consumer residential mortgages that were moved to nonperforming loans held for sale. See Note 1 ("Summary of Significant Accounting Policies") under the headings "Nonperforming Loans," "Impaired Loans," and "Allowance for Loan and Lease Losses" for a summary of our nonaccrual and charge-off policies. 77
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Figure 33. Summary of Nonperforming Assets and Past Due Loans from Continuing
Operations
December 31 ,
dollars in millions 2019 2018 2017 2016 2015
Commercial and industrial $ 264 $ 152 $ 153 $ 297 $ 82
Real estate - commercial mortgage 83 81 30 26 19
Real estate - construction 2 2 2 3 9
Total commercial real estate loans (a) 85 83 32 29 28
Commercial lease financing 6 9 6 8 13
Total commercial loans (b) 355 244 191 334 123
Real estate - residential mortgage 48 62 58 56 64
Home equity loans 145 210 229 223 190
Consumer direct loans 4 4 4 6 2
Credit cards 3 2 2 2 2
Consumer indirect loans 22 20 19 4 6
Total consumer loans 222 298 312 291 264
Total nonperforming loans (c) 577 542 503 625 387
Nonperforming loans held for sale 94 - - - -
OREO 35 35 31 51 14
Other nonperforming assets 9 - - - 2
Total nonperforming assets (c) $ 715 $ 577 $ 534
Accruing loans past due 90 days or more
404 208
Restructured loans - accruing and
nonaccruing (d) 347 399 317 280 280
Restructured loans included in nonperforming
loans (d) 183 247 189 141 159
Nonperforming assets from discontinued
operations - education lending business 7 8 7 5 7
Nonperforming loans to period-end portfolio
loans (c) .61 % .61 % .58 % .73 % .65 %
Nonperforming assets to period-end portfolio
loans plus OREO and other nonperforming
assets (c) .75 .64 .62 .79 .67
(a) See Figure 12 and the accompanying discussion in the "Loans and loans held
for sale" section for more information related to our commercial real estate
loan portfolio.
(b) See Figure 11 and the accompanying discussion in the "Loans and loans held
for sale" section for more information related to our commercial loan
portfolio.
(c) Nonperforming loan balances exclude
2018,
respectively.
(d) Restructured loans (i.e., TDRs) are those for which Key, for reasons related
to a borrower's financial difficulties, grants a concession to the borrower
that it would not otherwise consider. See Note 5,("Asset Quality") for more
information on our TDRs.
Figure 34 shows the types of activity that caused the change in our nonperforming loans during each of the last four quarters and the years endedDecember 31, 2019 , andDecember 31, 2018 . Figure 34. Summary of Changes in Nonperforming Loans from Continuing Operations 2019 Quarters in millions 2019 Fourth Third Second First 2018 Balance at beginning of period$ 542 $ 585 $ 561 $ 548 $ 542 $ 503 Loans placed on nonaccrual status 924 268 271 189 196 723 Charge-offs (380 ) (114 ) (91 ) (84 ) (91 ) (321 ) Loans sold (57 ) (1 ) - (38 ) (18 ) (17 ) Payments (141 ) (59 ) (37 ) (23 ) (22 ) (172 ) Transfers to OREO (19 ) (3 ) (4 ) (4 ) (8 ) (24 ) Transfers to nonperforming loans held for sale (125 ) (47 ) (78 ) - - - Transfers to other nonperforming assets (13 ) - - - (13 ) - Loans returned to accrual status (154 ) (52 ) (37 ) (27 ) (38 ) (150 ) Balance at end of period (a)$ 577 $ 577 $ 585 $ 561 $ 548 $ 542
(a) Nonperforming loan balances exclude
loans at
Operational and compliance risk management
Like all businesses, we are subject to operational risk, which is the risk of
loss resulting from human error or malfeasance, inadequate or failed internal
processes and systems, and external events. These events include, among other
things, threats to our cybersecurity, as we are reliant upon information systems
and the Internet to conduct our business activities. Operational risk also
encompasses compliance risk, which is the risk of loss from violations of, or
noncompliance with, laws, rules and regulations, prescribed practices, and
ethical standards. Under the Dodd-Frank Act, large financial companies like Key
are subject to heightened prudential standards and regulation. This heightened
level of regulation has increased our operational risk. Resulting operational
risk losses and/or additional regulatory compliance costs could take the form of
explicit charges, increased operational costs, harm to our reputation, or
foregone opportunities.
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We seek to mitigate operational risk through identification and measurement of risk, alignment of business strategies with risk appetite and tolerance, and a system of internal controls and reporting. We continuously strive to strengthen our system of internal controls to improve the oversight of our operational risk and to ensure compliance with laws, rules, and regulations. For example, an operational event database tracks the amounts and sources of operational risk and losses. This tracking mechanism helps to identify weaknesses and to highlight the need to take corrective action. We also rely upon software programs designed to assist in assessing operational risk and monitoring our control processes. This technology has enhanced the reporting of the effectiveness of our controls to senior management and the Board. The Operational Risk Management Program provides the framework for the structure, governance, roles, and responsibilities, as well as the content, to manage operational risk for Key. The Compliance Risk Committee serves the same function in managing compliance risk for Key. The Operational Risk Committee supports the ERM Committee by identifying early warning events and trends, escalating emerging risks, and discussing forward-looking assessments. The Operational Risk Committee includes attendees from each of the Three Lines of Defense. Primary responsibility for managing and monitoring internal control mechanisms lies with the managers of our various lines of business.The Operational Risk Committee andCompliance Risk Committee are senior management committees that oversee our level of operational and compliance risk and direct and support our operational and compliance infrastructure and related activities. These committees and the Operational Risk Management and Compliance functions are an integral part of our ERM Program. Our Risk Review function regularly assesses the overall effectiveness of our Operational Risk Management and Compliance Programs and our system of internal controls. Risk Review reports the results of reviews on internal controls and systems to senior management and the Risk and Audit Committees and independently supports the Risk Committee's oversight of these controls.
Cybersecurity
We maintain comprehensive Cyber Incident Response Plans, and we devote significant time and resources to maintaining and regularly updating our technology systems and processes to protect the security of our computer systems, software, networks, and other technology assets against attempts by third parties to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems, or cause other damage. We and many otherU.S. financial institutions have experienced distributed denial-of-service attacks from technologically sophisticated third parties. These attacks are intended to disrupt or disable online banking services and prevent banking transactions. We also periodically experience other attempts to breach the security of our systems and data. These cyberattacks have not, to date, resulted in any material disruption of our operations or material harm to our customers, and have not had a material adverse effect on our results of operations. Cyberattack risks may also occur with our third-party technology service providers, and may result in financial loss or liability that could adversely affect our financial condition or results of operations. Cyberattacks could also interfere with third-party providers' ability to fulfill their contractual obligations to us. Recent high-profile cyberattacks have targeted retailers, credit bureaus, and other businesses for the purpose of acquiring the confidential information (including personal, financial, and credit card information) of customers, some of whom are customers of ours. We may incur expenses related to the investigation of such attacks or related to the protection of our customers from identity theft as a result of such attacks. We may also incur expenses to enhance our systems or processes to protect against cyber or other security incidents. Risks and exposures related to cyberattacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking, and other technology-based products and services by us and our clients. As described in more detail in "Risk Management - Overview" in Item 7 of this report, the Board serves in an oversight capacity ensuring that Key's risks are managed in a manner that is effective and balanced and adds value for the shareholders. The Board's Risk Committee has primary oversight for enterprise-wide risk atKeyCorp , 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. 79
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GAAP to Non-GAAP Reconciliations
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, nor as a substitute for analyses of results as reported under GAAP. The tangible common equity ratio and the return on tangible common equity ratio have been a focus for some investors, and management believes that these ratios may assist investors in analyzing Key's capital position without regard to the effects of intangible assets and preferred stock. Since analysts and banking regulators may assess our capital adequacy using tangible common equity, we believe it is useful to enable investors to assess our capital adequacy on these same bases. Year endedDecember 31 , dollars in millions 2019 2018 2017 2016 2015 Tangible common equity to tangible assets at period end Key shareholders' equity (GAAP)$ 17,038 $ 15,595 $ 15,023 $ 15,240 $ 10,746 Less: Intangible assets (a) 2,910 2,818 2,928 2,788 1,080 Preferred Stock (b) 1,856 1,421 1,009 1,640 281
Tangible common equity (non-GAAP)
$ 144,988 $ 139,613 $ 137,698 $ 136,453 $ 95,131 Less: Intangible assets (a) 2,910 2,818
2,928 2,788 1,080
Tangible assets (non-GAAP) $ 142,078 $ 136,795 $ 134,770 $ 133,665 $ 94,051
Tangible common equity to tangible assets
ratio (non-GAAP) 8.64 % 8.30 % 8.23 % 8.09 % 9.98 %
Average tangible common equity
Average Key shareholders' equity (GAAP) $ 16,636 $ 15,131 $ 15,224 $ 12,647 $ 10,626
Less: Intangible assets (average) (c) 2,909 2,869 2,837 1,825 1,085
Preferred Stock (average) 1,755 1,205 1,137 627 290
Average tangible common equity
(non-GAAP) $ 11,972 $ 11,057 $ 11,250 $ 10,195 $ 9,251
Return on average tangible common equity
from continuing operations
Income (loss) from continuing operations
attributable to Key common shareholders
(GAAP) $ 1,611 $ 1,793 $
1,219
Average tangible common equity (non-GAAP)$ 11,972 $ 11,057 $ 11,250 $ 10,195 $ 9,251 Return on average tangible common equity from continuing operations (non-GAAP) 13.46 % 16.22 % 10.84 % 7.39 % 9.64 % Return on average tangible common equity consolidated Net income (loss) attributable to Key common shareholders (GAAP)$ 1,620 $ 1,800 $ 1,226 $ 754 $ 893 Average tangible common equity (non-GAAP) 11,972 11,057 11,250 10,195 9,251 Return on average tangible common equity consolidated (non-GAAP) 13.53 % 16.28 %
10.90 % 7.40 % 9.65 %
(a) For the years ended
December 31, 2016 , andDecember 31, 2015 , intangible assets exclude$7 million ,$14 million ,$26 million ,$42 million , and$45 million , respectively, of period-end purchased credit card relationships.
(b) Net of capital surplus.
(c) For the years ended
$10 million ,$20 million ,$34 million ,$43 million , and$55 million , respectively, of average purchased credit card relationships. The cash efficiency ratio is a ratio of two non-GAAP performance measures. Accordingly, there is no directly comparable GAAP performance measure. The cash efficiency ratio excludes the impact of our intangible asset amortization from the calculation. We believe this ratio provides greater consistency and comparability between our results and those of our peer banks. Additionally, this ratio is used by analysts and investors to evaluate how effectively management is controlling noninterest expenses in generating revenue, as they develop earnings forecasts and peer bank analysis. Year endedDecember 31 , dollars in millions 2019 2018 2017 2016 2015 Cash efficiency ratio Noninterest expense (GAAP)$ 3,901 $ 3,975 $ 4,098 $ 3,756 $ 2,840 Less: Intangible asset amortization (GAAP) 89 99 95 55 36 Adjusted noninterest expense (non-GAAP)$ 3,812 $ 3,876 $ 4,003 $ 3,701 $ 2,804 Net interest income (GAAP)$ 3,909 $ 3,909 $ 3,777 $ 2,919 $ 2,348 Plus: TE adjustment 32 31 53 34 28 Noninterest income (GAAP) 2,459 2,515 2,478 2,071 1,880 Total TE revenue (non-GAAP)$ 6,400 $ 6,455 $ 6,308 $ 5,024 $ 4,256 Cash efficiency ratio (non-GAAP) 59.6 % 60.0 % 63.5 % 73.7 % 65.9 % 80
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Table of Contents Year endedDecember 31 , dollars in millions 2019
Common Equity Tier 1 under the Regulatory Capital Rules Common Equity Tier 1 under current Regulatory Capital Rules
$ 12,356
Adjustments from current Regulatory Capital Rules to the fully phased-in Regulatory Capital Rules: Deferred tax assets and other intangible assets (a)
-
Common Equity Tier 1 anticipated under the fully phased-in Regulatory Capital Rules (b)
$ 12,356
Net risk-weighted assets under current Regulatory Capital Rules$ 130,865 Adjustments from current Regulatory Capital Rules to the fully phased-in Regulatory Capital Rules: Mortgage servicing assets (c) 878 Deferred tax assets 171 All other assets -
Total risk-weighted assets anticipated under the fully phased-in Regulatory Capital Rules (b)
$ 131,914
Common Equity Tier 1 ratio under the fully phased-in Regulatory Capital Rules (b)
9.37 %
(a) Includes the deferred tax assets subject to future taxable income for
realization, primarily tax credit carryforwards, as well as intangible assets
(other than goodwill and mortgage servicing assets) subject to the transition
provisions of the final rule.
(b) The anticipated amount of regulatory capital and risk-weighted assets is
based upon the federal banking agencies' Regulatory Capital Rules (as fully
phased-in on
under the "standardized approach."
(c) Item is included in the 25% exceptions bucket calculation and is
risk-weighted at 250%.
Fourth Quarter Results Figure 35 shows our financial performance for each of the past eight quarters. Highlights of our results for the fourth quarter of 2019 are summarized below. Earnings Our fourth quarter net income from continuing operations attributable to Key common shareholders was$439 million , or$.45 per diluted Common Share, compared to$459 million , or$.45 per diluted Common Share, for the fourth quarter of 2018. On an annualized basis, our return on average total assets from continuing operations for the fourth quarter of 2019 was 1.27%, compared to 1.37% for the fourth quarter of 2018. The annualized return on average tangible common equity from continuing operations was 14.09% for the fourth quarter of 2019, compared to 16.40% for the year-ago quarter.
Net interest income
TE net interest income was$987 million for the fourth quarter of 2019, compared to TE net interest income of$1.0 billion for the fourth quarter of 2018. The decrease in net interest income reflects a lower net interest margin, driven by a decline in interest rates and slightly higher deposit costs. Additionally, purchase accounting accretion declined$8 million . These declines were partially offset by higher earning asset balances.
Noninterest income
Our noninterest income was$651 million for the fourth quarter of 2019, compared to$645 million for the year-ago quarter. The increase reflects higher operating lease income, as well as growth in corporate services income, driven by higher derivatives income. Investments made in Key's mortgage business continue to drive consumer mortgage income and mortgage servicing fees.
Noninterest expense
Our noninterest expense was$980 million for the fourth quarter of 2019, compared to$1.0 billion for the fourth quarter of 2018. The fourth quarter of 2019 included notable items of$22 million , which consist of a pension settlement charge of$18 million and professional fees related to a previously disclosed fraud loss of$4 million . The year-ago period included notable items of$41 million , which were efficiency-related expenses of$24 million and a pension settlement charge of$17 million . Excluding notable items, noninterest expense decreased by$13 million from the year-ago period, reflecting the successful implementation of Key's expense initiatives, which drove personnel expenses lower. These expenses were partially offset byLaurel Road acquisition expenses. 81
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Table of Contents Provision for credit losses Our provision for credit losses was$109 million for the fourth quarter of 2019, compared to$59 million for the fourth quarter of 2018. This increase was partially due to a pre-tax loss related to a previously disclosed fraud incident of$16 million . Our ALLL was$900 million , or .95% of total period-end loans, atDecember 31, 2019 , compared to .99% atDecember 31, 2018 . Net loan charge-offs for the fourth quarter of 2019 totaled$99 million , or .42% of average total loans. These results compare to$60 million , or .27%, for the fourth quarter of 2018. This increase was partially due to a previously disclosed fraud incident.
Income taxes
For the fourth quarter of 2019, we recorded a tax provision from continuing operations of$75 million , compared to a tax provision of$92 million for the fourth quarter of 2018. The provision included a tax benefit of$11 million related to the reversal of a valuation allowance against federal and state capital loss carryforwards acquired fromFirst Niagara Financial Group utilized in the quarter. The effective tax rate for the fourth quarter of 2019 was 14.0%, compared to 15.9% for the same quarter one year ago. Our federal tax expense and effective tax rate differ from the amount that would be calculated using the federal statutory tax rate; primarily from investments in tax-advantaged assets, such as corporate-owned life insurance, tax credits associated with investments in low-income housing projects and energy related projects, and periodic adjustments to our tax reserves as described in Note 14 ("Income Taxes"). 82
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Figure 35. Selected Quarterly Financial Data
2019 Quarters 2018 Quarters
dollars in millions, except per share
amounts Fourth Third Second First Fourth Third Second First
FOR THE PERIOD
Interest income $ 1,285 $ 1,317 $ 1,329 $ 1,304 $ 1,297 $ 1,239 $ 1,205 $ 1,137
Interest expense 306 345 348 327 297 253 226 193
Net interest income 979 972 981 977 1,000 986 979 944
Provision for credit losses 109 200 74 62 59 62 64 61
Noninterest income 651 650 622 536 645 609 660 601
Noninterest expense 980 939 1,019 963 1,012 964 993 1,006
Income (loss) from continuing
operations before income taxes 541 483 510 488 574 569 582 478
Income (loss) from continuing
operations attributable to Key 466 413 423 406 482 482 479 416
Income (loss) from discontinued
operations, net of taxes 3 3 2 1 2 - 3 2
Net income (loss) attributable to Key 469 416 425 407 484 482 482 418
Income (loss) from continuing
operations attributable to Key common
shareholders 439 383 403 386 459 468 464 402
Income (loss) from discontinued
operations, net of taxes 3 3 2 1 2 - 3 2
Net income (loss) attributable to Key
common shareholders 442 386 405 387 461 468 467 404
PER COMMON SHARE
Income (loss) from continuing
operations attributable to Key common
shareholders $ .45 $ .39 $ .40 $
.38
- - - - - - - -
Net income (loss) attributable to Key
common shareholders (a) .45 .39 .40 .38 .45 .45 .44 .38
Income (loss) from continuing
operations attributable to Key common
shareholders - assuming dilution .45 .38 .40 .38 .45 .45 .44 .38
Income (loss) from discontinued
operations, net of taxes - assuming
dilution - - - - - - - -
Net income (loss) attributable to Key
common shareholders - assuming
dilution (a) .45 .39 .40 .38 .45 .45 .44 .38
Cash dividends paid .185 .185 .17 .17 .17 .17 .12 .105
Book value at period end 15.54 15.44 15.07 14.31 13.90 13.33 13.29 13.07 Tangible book value at period end 12.56 12.48 12.12
11.55 11.14 10.59 10.59 10.35 Weighted-average Common Shares outstanding (000)
973,450 988,319 999,163 1,006,717 1,018,614 1,036,479 1,052,652 1,056,037
Weighted-average Common Shares and
potential Common Shares
outstanding (000) (b) 984,361 998,328 1,007,964 1,016,504 1,030,417 1,049,976 1,065,793 1,071,786
AT PERIOD END
Loans $ 94,646 $ 92,760 $ 91,937 $ 90,178 $ 89,552 $ 89,268 $ 88,222 $ 88,089
Earning assets 130,807 132,160 130,213 127,296 125,803 125,007 123,472 122,961
Total assets 144,988 146,691 144,545 141,515 139,613 138,805 137,792 137,049
Deposits 111,870 111,649 109,946 108,175 107,309 105,780 104,548 104,751
Long-term debt 12,448 14,470 14,312 14,168 13,732 13,849 13,853 13,749 Key common shareholders' equity 15,138 15,216 15,069
14,474 14,145 13,758 14,075 13,919 Key shareholders' equity
17,038 17,116 16,969 15,924 15,595 15,208 15,100 14,944
PERFORMANCE RATIOS - FROM CONTINUING
OPERATIONS
Return on average total assets 1.27 % 1.14 % 1.19 % 1.18 % 1.37 % 1.40 % 1.41 % 1.25 % Return on average common equity 11.40 9.99 10.94
10.98 13.07 13.36 13.29 11.76
Return on average tangible common
equity (c) 14.09 12.38 13.69 13.69 16.40 16.81 16.73 14.89
Net interest margin (TE) 2.98 3.00 3.06 3.13 3.16 3.18 3.19 3.15
Cash efficiency ratio (c) 58.7 56.0 61.9 61.9 59.9 58.7 58.8 62.9
PERFORMANCE RATIOS - FROM
CONSOLIDATED OPERATIONS
Return on average total assets 1.27 % 1.14 % 1.19 % 1.17 % 1.37 % 1.39 % 1.40 % 1.24 % Return on average common equity 11.48 10.07 11.00
11.01 13.13 13.36 13.37 11.82
Return on average tangible common
equity (c) 14.19 12.48 13.75 13.72 16.47 16.81 16.84 14.97
Net interest margin (TE) 2.97 2.98 3.05 3.12 3.14 3.16 3.17 3.13
Loan to deposit (d) 86.6 85.3 86.1 86.1 85.6 87.0 86.9 86.9 CAPITAL RATIOS AT PERIOD END Key shareholders' equity to assets 11.75 % 11.67 % 11.74 %
11.25 % 11.17 % 10.96 % 10.96 % 10.90 % Key common shareholders' equity to assets
10.47 10.40 10.46 10.25 10.15 9.93 10.21 10.16
Tangible common equity to tangible
assets (c) 8.64 8.58 8.59 8.43 8.30 8.05 8.32 8.22
Common Equity Tier 1 9.44 9.48 9.57 9.81 9.93 9.95 10.13 9.99
Tier 1 risk-based capital 10.86 10.91 11.01 10.94 11.08 11.11 10.95 10.82
Total risk-based capital 12.79 12.90 13.03 12.98 12.89 12.99 12.83 12.73
Leverage 9.88 9.93 10.00 9.89 9.89 10.03 9.87 9.76
TRUST ASSETS
Assets under management $ 40,833 $ 39,416 $ 38,942 $ 38,742 $ 36,775 $ 40,575 $ 39,663 $ 39,003
OTHER DATA
Average full-time-equivalent
employees 16,537 16,898 17,206 17,554 17,664 18,150 18,376 18,540
Branches 1,098 1,101 1,102 1,158 1,159 1,166 1,177 1,192
(a) EPS may not foot due to rounding.
(b) Assumes conversion of Common Share options and other stock awards and/or
convertible preferred stock, as applicable.
(c) See Figure 36 entitled "Selected Quarterly GAAP to Non-GAAP Reconciliations,"
which presents the computations of certain financial measures related to
"tangible common equity," and "cash efficiency." The table reconciles the
GAAP performance measures to the corresponding non-GAAP measures, which
provides a basis for period-to-period comparisons.
(d) Represents period-end consolidated total loans and loans held for sale
divided by period-end consolidated total deposits.
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Figure 36. Selected Quarterly GAAP to Non-GAAP Reconciliations
2019 Quarters 2018 Quarters
dollars in millions Fourth Third Second First Fourth Third Second First
Tangible common equity to tangible assets at
period end
Key shareholders' equity (GAAP) $ 17,038 $ 17,116 $ 16,969 $ 15,924 $ 15,595 $ 15,208 $ 15,100 $ 14,944
Less: Intangible assets (a) 2,910 2,928 2,952 2,804 2,818 2,838 2,858 2,902
Preferred Stock (b) 1,856 1,856 1,856 1,421 1,421 1,421 1,009 1,009
Tangible common equity (non-GAAP) $ 12,272 $ 12,332 $
12,161
$ 144,988 $ 146,691 $
144,545
2,910 2,928 2,952 2,804 2,818 2,838 2,858 2,902
Tangible assets (non-GAAP) $ 142,078 $ 143,763 $
141,593
8.64 % 8.58 %
8.59 % 8.43 % 8.30 % 8.05 % 8.32 % 8.22 %
Average tangible common equity
Average Key shareholders' equity (GAAP)
Preferred Stock (average) 1,900 1,900 1,762 1,450 1,450 1,316 1,025 1,025
Average tangible common equity
(non-GAAP) $ 12,359 $ 12,271 $ 11,810 $ 11,439 $ 11,106 $ 11,046 $ 11,124 $ 10,948
Return on average tangible common equity from
continuing operations
Net income (loss) from continuing operations
attributable to Key common shareholders
(GAAP) $ 439 $ 383 $
403
14.09 % 12.38 % 13.69 % 13.69 % 16.40 % 16.81 % 16.73 % 14.89 %
Return on average tangible common equity
consolidated
Net income (loss) attributable to Key common
shareholders (GAAP) $ 442 $ 386 $
405
14.19 % 14.19 % 14.19 % 14.19 % 14.19 % 14.19 % 14.19 % 14.97 % Cash efficiency ratio Noninterest expense (GAAP)
$ 980 $ 939 $ 1,019 $ 963 $ 1,012 $ 964 $ 993 $ 1,006 Less: Intangible asset amortization (GAAP) 19 26 22 22 22 23 25 29 Adjusted noninterest expense (non-GAAP)$ 961 $ 913 $ 997 $ 941 $ 990 $ 941 $ 968 $ 977 Net interest income (GAAP)$ 979 $ 972 $ 981 $ 977 $ 1,000 $ 986 $ 979 $ 944 Plus: TE adjustment 8 8 8 8 8 7 8 8 Noninterest income (GAAP) 651 650 622 536 645 609 660 601 Total TE revenue (non-GAAP)$ 1,638 $ 1,630 $ 1,611 $ 1,521 $ 1,653 $ 1,602 $ 1,647 $ 1,553 Cash efficiency ratio (non-GAAP) 58.7 % 56.0 %
61.9 % 61.9 % 59.9 % 58.7 % 58.8 % 62.9 %
(a) For the three months ended
2019, and
card relationships. For the three months ended December 31,
2018 , September 30, 2018 , June 30, 2018 , and March 31, 2018 , intangible
assets exclude $14 million , $17 million , $20 million , and $23 million ,
respectively, of period-end purchased credit card relationships.
(b) Net of capital surplus.
(c) For the three months ended
2019, and
million,
credit card relationships. For the three months ended
2018,
intangible assets exclude
million, respectively, of average purchased credit card relationships.
Critical Accounting Policies and Estimates
Our business is dynamic and complex. Consequently, we must exercise judgment in
choosing and applying accounting policies and methodologies. These choices are
critical; not only are they necessary to comply with GAAP, they also reflect our
view of the appropriate way to record and report our overall financial
performance. All accounting policies are important, and all policies described
in Note 1 ("Summary of Significant Accounting Policies") should be reviewed for
a greater understanding of how we record and report our financial performance.
In our opinion, some accounting policies are more likely than others to have a
critical effect on our financial results and to expose those results to
potentially greater volatility. These policies apply to areas of relatively
greater business importance, or require us to exercise judgment and to make
assumptions and estimates that affect amounts reported in the financial
statements. Because these assumptions and estimates are based on current
circumstances, they may prove to be inaccurate, or we may find it necessary to
change them. The following is a description of our current critical accounting
policies.
Allowance for loan and lease losses
The ALLL is calculated with the objective of maintaining a reserve sufficient to
absorb estimated probable losses incurred in the loan portfolio. In determining
the ALLL, we apply expected loss rates to existing loans with similar risk
characteristics and exercise judgment to assess the impact of factors such as
changes in economic conditions, underwriting standards, concentrations of
credit, collateral values, and the amounts and timing of expected future cash
flows. For all commercial and consumer TDRs, regardless of size, as well as all
other impaired commercial loans with outstanding balances of $2.5 million or
greater, we conduct further analysis to determine the probable loss and assign a
specific allowance to the loan.
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Our loss estimates include an assessment of internal and external influences on credit quality that may not be fully reflective of the historical loss, risk-rating, or other indicative data. The ALLL is sensitive to a variety of internal factors, such as modifications in the mix and level of loan balances outstanding, portfolio performance and assigned risk ratings. The ALLL is also sensitive to a variety of external factors, such as the general health of the economy, as evidenced by volatility in commodity prices, changes in real estate demand and values, interest rates, unemployment rates, bankruptcy filings, fluctuations in the GDP, and the effects of weather and natural disasters such as droughts, floods and hurricanes. Management considers these variables and all other available information when establishing the final level of the ALLL. These variables and others may result in actual loan losses that differ from the originally estimated amounts. Since our loss rates are applied to large pools of loans, even minor changes in the level of estimated losses can significantly affect management's determination of the appropriate ALLL because those changes must be applied across a large portfolio. To illustrate, an increase in estimated losses equal to one-tenth of one percent of our consumer loan portfolio as ofDecember 31, 2019 , would indicate the need for a$27 million increase in the ALLL. The same increase in estimated losses for the commercial loan portfolio would result in a$68 million increase in the ALLL. Such adjustments to the ALLL can materially affect financial results. Following the above examples, a$27 million increase in the consumer loan portfolio allowance would have reduced our earnings on an after-tax basis by approximately$20 million , or$.02 per Common Share; a$68 million increase in the commercial loan portfolio allowance would have reduced earnings on an after-tax basis by approximately$52 million , or$.05 per Common Share. Our accounting policy related to the ALLL is disclosed in Note 1 under the heading "Allowance for Loan and Lease Losses." As described in Note 1, ("Summary of Significant Accounting Policies"), onJanuary 1, 2020 , we adopted ASC 326, Financial Instruments - Credit Losses, and as such, an expected credit loss methodology, specifically current expected credit losses for the remaining life of our loans and leases, will be used to estimate the appropriate level of the ALLL. Valuation methodologies Fair value measurements We measure or monitor many of our assets and liabilities on a fair value basis. Fair value is generally defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price), in an orderly transaction between market participants at the measurement date under current market conditions. While management uses judgment when determining the price at which willing market participants would transact when there has been a significant decrease in the volume or level of activity for the asset or liability in relation to "normal" market activity, management's objective is to determine the point within the range of fair value estimates that is most representative of a sale to a third-party investor under current market conditions. The value to us if the asset or liability were held to maturity is not included in the fair value estimates. A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of nonperformance. Fair value is measured based on a variety of inputs. Fair value may be based on quoted market prices for identical assets or liabilities traded in active markets (Level 1 valuations). If market prices are not available, quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-based valuation techniques for which all significant assumptions are observable in the market are used (Level 2 valuations). Where observable market data is not available, the valuation is generated from model based techniques that use significant assumptions not observable in the market, but observable based on our specific data (Level 3 valuations). Unobservable assumptions reflect our estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. The selection and weighting of the various fair value techniques may result in a fair value higher or lower than carrying value. Considerable judgment may be involved in determining the amount that is most representative of fair value. 85
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For assets and liabilities recorded at fair value, our policy is to maximize the
use of observable inputs
and minimize the use of unobservable inputs when developing fair value
measurements for those items where there
is an active market. In certain cases, when market observable inputs for
model-based valuation techniques may not
be readily available, we are required to make judgments about assumptions market
participants would use
in estimating the fair value of the financial instrument. The models used to
determine fair value adjustments are
regularly evaluated by management for relevance under current facts and
circumstances.
Changes in market conditions may reduce the availability of quoted prices or
observable data. For example, reduced liquidity in the capital markets or
changes in secondary market activities could result in observable market inputs
becoming unavailable. When market data is not available, we use valuation
techniques requiring more management judgment to estimate the appropriate fair
value.
Fair value is used on a recurring basis for certain assets and liabilities in
which fair value is the primary measure of
accounting. Fair value is used on a nonrecurring basis to measure certain assets
or liabilities (including held-to-maturity securities, commercial loans held for
sale, and OREO) for impairment or for disclosure purposes in accordance with
current accounting guidance.
Impairment analysis also relates to long-lived assets, goodwill, and core
deposit and other intangible assets. An
impairment loss is recognized if the carrying amount of the asset is not likely
to be recoverable and exceeds its fair
value. In determining the fair value, management uses models and applies the
techniques and assumptions
previously discussed.
See Note 1 under the heading "Fair Value Measurements" and Note 6 ("Fair Value
Measurements") for a detailed discussion of determining fair value, including
pricing validation processes.
The valuation and testing methodologies used in our analysis of goodwill impairment are summarized in Note 1 under the heading "Goodwill and Other Intangible Assets." Although accounting guidance permits an entity to first assess qualitative factors to determine whether additional goodwill impairment testing is required, Key chose to utilize the quantitative approach in 2019. The quantitative approach is a two step goodwill impairment test. The first step in goodwill impairment testing is to determine the fair value of each reporting unit. The amount of capital being allocated to our reporting units as a proxy for the carrying value is based on risk-based regulatory capital requirements. Fair values are estimated using an equal combination of market and income approaches. The market approach incorporates comparable public company multiples along with data related to recent merger and acquisition activity. The income approach consists of discounted cash flow modeling that utilizes internal forecasts and various other inputs and assumptions. A multi-year internal forecast is prepared for each reporting unit and a terminal growth rate is estimated for each one based on market expectations of inflation and economic conditions in the financial services industry. Earnings projections for each reporting unit are adjusted for after tax cost savings expected to be realized by a market participant. The discount rate applied to our cash flows is derived from the CAPM. The buildup to the discount rate includes a risk-free rate, 5-year adjusted beta based on peer companies, a market equity risk premium, a size premium and a company specific risk premium. The discount rates differ between our reporting units as they have varying levels of risk. A sensitivity analysis is typically performed on key assumptions, such as the discount rates and cost savings estimates. If the fair value determined in step 1 is greater than the carrying value, then the reporting unit's goodwill is deemed not to be impaired. If the fair value is less than the carrying value, then the second step is performed, which measures the amount of impairment by comparing the carrying amount of goodwill to its implied fair value. The second step of the goodwill impairment test was not required in 2019. EffectiveJanuary 1, 2020 , upon the adoption of ASU 2017-04, the second step of the goodwill impairment test was eliminated.
We continue to monitor the impairment indicators for goodwill and other
intangible assets, and to evaluate the carrying amount of these assets
quarterly. Additional information is provided in Note 12 ("
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Derivatives and hedging
We primarily use interest rate swaps to hedge interest rate risk for asset and
liability management purposes. These derivative instruments modify the interest
rate characteristics of specified on-balance sheet assets and liabilities. Our
accounting policies related to derivatives reflect the current accounting
guidance, which provides that all derivatives should be recognized as either
assets or liabilities on the balance sheet at fair value, after taking into
account the effects of master netting agreements. Accounting for changes in the
fair value (i.e., gains or losses) of a particular derivative depends on whether
the derivative has been designated and qualifies as part of a hedging
relationship, and further, on the type of hedging relationship.
The application of hedge accounting requires significant judgment to interpret
the relevant accounting guidance, as well as to assess hedge effectiveness,
identify similar hedged item groupings, and measure changes in the fair value of
the hedged items. We believe our methods of addressing these judgments and
applying the accounting guidance are consistent with both the guidance and
industry practices. Additional information relating to our use of derivatives is
included in Note 1 under the heading "Derivatives and Hedging," and Note 8
("Derivatives and Hedging Activities").
Contingent liabilities, guarantees and income taxes
Note 22 ("Commitments, Contingent Liabilities, and Guarantees") summarizes
contingent liabilities arising from litigation and contingent liabilities
arising from guarantees in various agreements with third parties under which we
are a guarantor, and the potential effects of these items on the results of our
operations. We record a liability for the fair value of the obligation to stand
ready to perform over the term of a guarantee, but there is a risk that our
actual future payments in the event of a default by the guaranteed party could
exceed the recorded amount. See Note 22 ("Commitments, Contingent Liabilities,
and Guarantees") for a comparison of the liability recorded and the maximum
potential undiscounted future payments for the various types of guarantees that
we had outstanding at December 31, 2019 .
It is not always clear how the Internal Revenue Code and various state tax laws
apply to transactions that we undertake. In the normal course of business, we
may record tax benefits and then have those benefits contested by the IRS or
state tax authorities. We have provided tax reserves that we believe are
adequate to absorb potential adjustments that such challenges may necessitate.
However, if our judgment later proves to be inaccurate, the tax reserves may
need to be adjusted, which could have an adverse effect on our results of
operations and capital.
Additionally, we conduct quarterly assessments that determine the amount of
deferred tax assets that are more-likely-than-not to be realized, and therefore
recorded. The available evidence used in connection with these assessments
includes a history of pretax income, projected future taxable income, potential
tax-planning strategies, and projected future reversals of deferred tax
liabilities. These assessments are subjective and may change. Based on these
criteria, and all available positive and negative evidence, we establish a
valuation allowance for deferred tax assets when we are unable to conclude it is
more likely than not that they will be realized. However, if our assessments
prove incorrect, they could have a material adverse effect on our results of
operations in the period in which they occur. For further information on our
accounting for income taxes, see Note 1 ("Summary of Significant Accounting
Policies") and Note 14 ("Income Taxes").
During 2019, we did not significantly alter the manner in which we applied our
critical accounting policies or developed related assumptions and estimates.
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Accounting and reporting developments
Accounting guidance pending adoption at
Required Description Effect on Financial Statements or
Adoption Other Significant Matters
ASU January 1, This ASU simplifies the The adoption of this accounting
2019-12, Simplifying 2021 accounting for income guidance is not expected to have a
the Accounting for taxes by removing material effect on our financial
Income Taxes Early certain exceptions to condition or results of operations.
adoption the existing guidance,
is such as exceptions
permitted related to the
incremental approach
for intraperiod tax
allocation, the
methodology for
calculating income
taxes in an interim
period when a
year-to-date loss
exceeds the anticipated
loss and the
recognition of deferred
tax liabilities when a
foreign subsidiary
becomes an equity
method investment and
when a foreign equity
method investment
becomes a subsidiary.
Along with general
improvements, it adds
simplifications related
to franchise taxes, the
tax basis of goodwill
and the method for
recognizing an enacted
change in tax laws. The
guidance also specifies
that an entity is not
required to allocate
the consolidated amount
of certain tax expense
to a legal entity not
subject to tax in its
own separate financial
statements.
The guidance should be
applied on either a
retrospective, modified
retrospective or
prospective basis
depending on the
amendment.
ASU 2020-01, January 1, This guidance clarifies The adoption of this accounting
Clarifying the 2021 that when applying the guidance is not expected to have a
Interactions between measurement alternative material effect on our financial
Topic Early in Topic 321, companies condition or results of operations.
321,Investments-Equity adoption should consider certain
Securities; Topic 323, is observable transactions
Investments- Equity permitted that require the
Method and Joint application or
Ventures; and Topic discontinuance of the
815, Derivatives and equity method under
Hedging Topic 323.
It also clarifies that
companies should not
consider whether the
underlying securities
in certain forward
contracts and purchased
options would be
accounted for under the
equity method or fair
value option when
determining the method
of accounting for those
contracts.
This guidance should be
applied on a
prospective basis.
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European Sovereign and Non-Sovereign Debt Exposures
Our total European sovereign and non-sovereign debt exposure is presented in Figure 37.
Figure 37. European Sovereign and Non-Sovereign Debt Exposures
Short- and Long- Foreign Exchange
December 31, 2019 Term Commercial and Derivatives
in millions Total (a) with Collateral (b) Net
Exposure
France :
Sovereigns - - -
Non-sovereign financial institutions - - -
Non-sovereign non-financial institutions $ 2 - $ 2
Total 2 - 2
Germany:
Sovereigns - - -
Non-sovereign financial institutions - - -
Non-sovereign non-financial institutions 38 - 38
Total 38 - 38
Italy:
Sovereigns - - -
Non-sovereign financial institutions - - -
Non-sovereign non-financial institutions 4 - 4
Total 4 - 4
Luxembourg:
Sovereigns - - -
Non-sovereign financial institutions - - -
Non-sovereign non-financial institutions 8 - 8
Total 8 - 8
Switzerland:
Sovereigns - - -
Non-sovereign financial institutions - - -
Non-sovereign non-financial institutions - - -
Total - - -
United Kingdom:
Sovereigns - - -
Non-sovereign financial institutions - $ 282 282
Non-sovereign non-financial institutions 1 - 1
Total 1 282 283
Total Europe:
Sovereigns - - -
Non-sovereign financial institutions - 282 282
Non-sovereign non-financial institutions 53 - 53
Total $ 53 $ 282 $ 335
(a) Represents our outstanding leases.
(b) Represents contracts to hedge our balance sheet asset and liability needs,
and to accommodate our clients' trading and/or hedging needs. Our derivative
mark-to-market exposures are calculated and reported on a daily basis. These
exposures are largely covered by cash or highly marketable securities
collateral with daily collateral calls.
Our credit risk exposure is largely concentrated in developed countries with
emerging market exposure essentially limited to commercial facilities; these
exposures are actively monitored by management. We do not have at-risk exposures
in the rest of the world.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information included under the caption "Risk Management - Market risk
management" in the MD&A beginning on page 66 is incorporated herein by
reference.
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