KEY — Q3 2026 Financial Report Analysis

Overview

KeyCorp, the Cleveland-based regional bank, earned $537 million for common shareholders in the third quarter of 2026 (the three months to September 30), up 18.5% from $453 million a year earlier. Diluted earnings per share rose 24%, from $0.41 to $0.51. Three things did the work: net interest income grew 9.8% as deposit costs fell, investment banking fees jumped 27% from the second quarter, and the provision for bad loans fell 43% as problem loans shrank. Buybacks did the rest: the average diluted share count was 4.2% lower than a year ago.

The weak spot is not in the income statement but on the balance sheet. Key's unrealized losses (paper losses on bonds and hedges that have not been sold) widened by about $1.5 billion in the quarter, and tangible book value per share fell 9% in three months, from $13.62 to $12.35.

This analysis is based on Key's October 20, 2026 earnings release (Exhibit 99.1 to its 8-K) and the earnings presentation filed with it. The full Form 10-Q has not been filed yet, so cash-flow figures and the detailed management discussion are not available.

Key metrics

As in our Q2 report, "revenue" here means GAAP net interest income plus noninterest income (fees). Key's own headline, "total revenue (TE)", was $2,052 million, up 8.3%; it adds an $8 million taxable-equivalent adjustment that shows tax-exempt interest as if it were taxed. Net income is net income attributable to common shareholders, the figure EPS is based on.

A few definitions:

• Net interest income (NII) is the gap between what Key earns on loans and bonds and what it pays on deposits and borrowings. It is about two-thirds of revenue.
• Net interest margin (NIM) is that gap as a share of the bank's interest-earning assets, at an annual rate. A basis point (bp) is 0.01 percentage point.
• Cash efficiency ratio is costs as a share of revenue, leaving out amortization of intangible assets. Lower is better: Key spent about 61 cents to earn each dollar of revenue. Key does not publish a plain GAAP efficiency ratio, so this is the figure used here.
• Net charge-offs are loans written off as uncollectable, minus recoveries.
• CET1 ratio is the bank's core loss-absorbing capital as a share of its risk-weighted assets; regulators set minimums for it.

Why the margin widened again

NIM rose 20 basis points from a year ago and 6 basis points from Q2, to 2.95%. Against a year ago, the release credits "a reduction in deposit costs as a result of declining interest rates and proactive deposit beta management" ("deposit beta" is how much of a rate change a bank passes on to depositors), the reinvestment of maturing low-yielding bonds and interest-rate swaps into higher-yielding ones, a bigger balance sheet, and a continued shift toward commercial and industrial (C&I) loans. The income statement shows each piece:

• Deposits got cheaper. Interest paid on deposits fell from $748 million to $634 million. The overall cost of deposits dropped from 1.97% to 1.66%, and expensive time deposits (CDs) shrank 21% on average, to $12.1 billion.
• The loan book tilted toward business lending. Average C&I loans rose 13.9% to $64.4 billion, while consumer loans fell 7.5% to $28.5 billion, which Key calls "the intentional run-off of low-yielding loans." C&I loans yielded 5.82% this quarter.
• Old assets are being replaced. Interest on held-to-maturity bonds rose from $64 million to $98 million as that portfolio grew to $9.6 billion.

The sequential picture is less about spreads. Key's own walk of the $50 million Q2-to-Q3 increase in NII (TE) gives $14 million to loan growth, $13 million to "funding optimization", $11 million to securities and swap repricing, $8 million to one extra day in the quarter, and $3 million to other yield changes. Deposit costs actually rose 3 basis points from Q2, to 1.66%.

Deposits, not just loans, grew this quarter. Average deposits rose $3.6 billion from Q2 while average loans rose $1.5 billion, so Key funded its lending growth with customer money rather than wholesale borrowing. The period-end figures are less tidy: non-interest-bearing deposits fell from $30.9 billion at June 30 to $28.2 billion at September 30, and short-term borrowings rose from $3.7 billion to $5.2 billion.

Fees: dealmaking came back

Investment banking fees rose $45 million from Q2, which the presentation attributes to "higher M&A fees and syndications" (syndication is arranging a loan that several lenders share). In Q2, these fees had fallen because of delayed deal closings, so part of the jump is deals that slipped from one quarter to the next. Key's purchase of UK advisory firm Clearwater Corporate Finance closed on August 3, inside this quarter; goodwill rose $51 million, which fits that deal, but the release does not say how much Clearwater added to fees. Wealth management fees grew 10% as assets under management reached $74.5 billion, up 9.7% in a year.

Commercial mortgage servicing fees remain the weak line, down $20 million from a year ago. These are fees for administering commercial real estate loans for other lenders, including troubled ones.

Costs: mostly pay

Noninterest expense rose $68 million (5.8%). Personnel costs rose $73 million to $815 million, which the release ties to "continued investments in people, employee benefits, and incentive compensation associated with noninterest income growth." All other costs combined fell. The year-ago quarter included a $5 million benefit from a reduced FDIC special assessment (a one-time charge regulators levied on banks after the 2023 bank failures); excluding it, expenses rose 5.3%. Revenue (TE) grew 8.3%, so revenue outran costs by about 3 percentage points. That gap, called operating leverage, is what pushed the cash efficiency ratio down to 60.6%.

Credit: the Q2 scare eased

Nonperforming loans are loans that have stopped paying as agreed. They fell $191 million in the quarter, and most of that came from borrowers paying down or off: $190 million of payments, against $38 million in Q2. Charge-offs removed $121 million and loan sales $28 million.

The provision of $61 million was $28 million less than net charge-offs, which means Key released reserves (money set aside in advance for future loan losses). The two business segments moved in opposite directions. The Commercial Bank's provision fell to $8 million from $68 million a year ago, "driven by a reserve release reflective of portfolio changes and lower net charge-offs." The Consumer Bank's provision rose to $55 million from $40 million, "primarily reflecting a reserve build as a result of economic conditions." Key is setting aside more for consumers while its consumer loan book shrinks.

Not every early indicator improved. Criticized assets (loans the bank has flagged as weaker, a step before nonperforming) rose to $5.55 billion from $5.40 billion in Q2, though they stayed at 4.9% of loans. Loans 30-89 days past due edged up to 0.14% of loans from 0.12%.

What the headline numbers hide

• The 15% return is partly a smaller denominator. Return on tangible common equity (ROTCE: profit as a share of common equity excluding goodwill and other intangibles) jumped to 15.1% partly because average tangible common equity fell 4%, from $14.7 billion to $14.1 billion. On Q2's equity base, Q3's profit would have been a return of about 14.5%. That is still a big improvement, but some of it is shrinking equity, not only rising profit.
• Book value fell sharply. Accumulated other comprehensive loss, where unrealized losses on bonds and hedges are recorded, grew from $2.35 billion to $3.87 billion in one quarter. The release does not explain why. It is consistent with the "higher interest rates" it mentions in the Q2-to-Q3 margin discussion, since bond prices fall when rates rise. Regulatory CET1 ignores most of these losses, which is why it barely moved (11.2% to 11.1%). Key's own "marked" CET1, which counts them, fell from 9.8% to 9.0%. That is below the 9.5–10% long-term range Key lists in its presentation.
• Buybacks and taxes pulled in opposite directions. Average diluted shares fell 4.2% year over year after $320 million of repurchases this quarter (at $22.57 a share on average). That explains most of the gap between 18.5% profit growth and 24% EPS growth. Going the other way, the effective tax rate rose to 21.5% from 18.6%: pre-tax income grew 22.6%, faster than net income.
• A preferred-stock redemption cost common shareholders $5.9 million. Key redeemed its Series D preferred stock (preferred stock fell from $2.5 billion to $1.98 billion) and paid a call premium. Preferred dividends were $42 million this quarter against $36 million in Q2. That cost about half a cent of EPS and will not recur; Key's schedule shows $29 million of preferred dividends for Q4.
• No adjustments this quarter. Key reported no "selected items", so GAAP and adjusted EPS are the same $0.51. The year-ago quarter's $4 million after-tax FDIC benefit is the only one-off in the comparison, and it is too small to matter.
• Cash conversion can't be checked yet. The earnings release has no cash-flow statement; that comes with the 10-Q.

Did last time's read hold up?

Our Q2 report said the main thing to watch in Q3 was credit: "another quarter of $300 million-plus nonaccrual inflows would test management's 'idiosyncratic' explanation." That did not happen. New nonaccruals fell to $165 million, nonperforming loans dropped 24%, and net charge-offs fell to 0.32%. So far, management's view that Q2's problem loans were a handful of specific borrowers looks right. We also noted that hitting the NII guidance needed about $1.30–1.35 billion of NII (TE) per quarter in the second half. Q3 came in at $1.308 billion, the low end of that range.

Takeaway: Key's earnings power is clearly improving: record revenue, a 2.95% margin, lower credit losses and a 15% return on tangible equity. But the quarter also cost common shareholders 9% of tangible book value per share through bond and hedge losses, and the return is flattered by that shrinking equity. The profit trend is strong; the balance sheet is more sensitive to rising rates than the regulatory capital ratio shows.

Outlook

Key updated its full-year 2026 guidance (compared with 2025) on October 20:

Key also expects about $1.3 billion of buybacks in 2026, a GAAP tax rate of about 22%, and keeps its end-of-2027 targets of a NIM above 3.25% and ROTCE above 15%.

Our view: Revenue, fee, loan and credit guidance all improved. Net interest income narrowed to the middle of its old range (about 10%), while expenses moved to the top of theirs (about 4%) and the margin target to the bottom (about 3.00%). The math leaves room for a strong Q4: NII (TE) up about 10% for the year implies roughly $1.34 billion in Q4, about 2.5% above Q3. That depends on loan growth continuing and on Key's hedging program. Swaps and bonds yielding about 3.4% mature from Q4 2026 through 2027, and Key added $9.1 billion of new receive-fixed swaps this quarter at about 4.1–4.2%. Charge-offs averaged about 0.37% of loans over the first nine months, so the 37–39 bp full-year range implies Q4 somewhere around 0.36–0.44%, at or above Q3's 0.32%. The two things to watch are whether book value keeps falling if rates rise further, and whether the Consumer Bank's reserve build is the start of a trend.

Capital ratios as of September 30, 2026 are Key's estimates. Guidance, the NII walk, swap details and preferred dividend figures come from the earnings presentation (Exhibit 99.2); all other figures come from the earnings release and financial supplement (Exhibit 99.1).