KeyCorp 10-Q Summary: First Quarter 2022
Business context and reporting period
KeyCorp reported unaudited results for the three months ended March 31, 2022, compared with the first quarter of 2021. Its primary businesses are Consumer Bank and Commercial Bank. Amounts are in U.S. dollars; financial figures below are in millions unless noted.
Financial performance and condition
- Earnings: Net income attributable to Key was $448, down from $622. Continuing-operations income attributable to common shareholders was $420, or diluted EPS of $0.45, compared with $591, or $0.61, a year earlier.
- Revenue and margins: Taxable-equivalent total revenue was $1,696, down 3% from $1,750. GAAP net interest income increased to $1,014 from $1,005; taxable-equivalent net interest income was $1,020. Net interest margin declined 15 basis points to 2.46%.
- Credit costs: Provision for credit losses was $83 versus a $93 benefit in Q1 2021. Net charge-offs were $33, or 0.13% of average loans, versus $114, or 0.46%. Nonperforming assets were $467, down from $790 a year earlier; nonperforming loans were 0.41% of period-end loans.
- Noninterest income and expense: Noninterest income fell to $676 from $738, while noninterest expense was essentially unchanged at $1,070 versus $1,071. The non-GAAP cash efficiency ratio increased to 62.4% from 60.3%.
- Segment results: Consumer Bank net income was $70 versus $217; Commercial Bank net income was $283 versus $383. Consumer Bank expenses rose, partly reflecting digital investment and compensation; Commercial Bank expenses declined.
- Loans and deposits: Period-end loans were $106.6 billion, up from $101.9 billion at December 31, 2021. Deposits were $148.7 billion, down from $152.6 billion. Average deposits were $150.2 billion, up $12.4 billion year over year.
- Liquidity and funding: The consolidated loan-to-deposit ratio was 73%. Key reported a $37.5 billion liquid asset portfolio and unused secured borrowing capacity of $28.3 billion at the Federal Reserve Bank of Cleveland and $12.2 billion at the FHLB. Wholesale funding totaled $13.6 billion, up from $12.8 billion at year-end.
- Capital: KeyCorp’s CET1 ratio was 9.4%, Tier 1 capital ratio 10.7%, total capital ratio 12.4%, and leverage ratio 8.6%; each exceeded applicable regulatory minimums. KeyBank met the regulatory definition of “well capitalized.” Tangible common equity to tangible assets was 6.0%, down from 6.9% at year-end.
- Cash flows: Operating activities provided $881, investing activities provided $1,974, and financing activities used $3,084. Cash and due from banks declined to $684 from $913 at year-end.
Material changes versus comparable periods
- Net income fell year over year, reflecting lower noninterest income and a swing from a credit-loss benefit to a provision, despite slightly higher net interest income and stable total expenses.
- Revenue declines included lower prepaid card activity, lower consumer mortgage gains, and market valuation adjustments; deposit service charges and corporate services income increased.
- Average loans grew $3.0 billion year over year, led by residential mortgage and Laurel Road consumer lending and commercial real estate growth. The indirect auto portfolio exit and lower PPP fees weighed on comparisons.
- Net charge-offs and nonperforming assets improved substantially year over year, though the allowance for loan and lease losses rose to $1.105 billion from $1.061 billion at December 31, 2021.
- Accumulated other comprehensive loss widened to $2.929 billion from $586 million at year-end, primarily reflecting unrealized losses on available-for-sale securities and derivatives. Shareholders’ equity declined to $15.3 billion from $17.4 billion.
Outlook, commentary, risks and contingencies
- Management continued to expect positive operating leverage for full-year 2022. Long-term targets include a 54%–56% cash efficiency ratio, 16%–19% return on average tangible common equity, and net charge-offs of 0.40%–0.60% through a credit cycle. Management forecast 2022 net charge-offs averaging 0.15%–0.25%; the first-quarter rate was 0.13%.
- Management said loan growth and liquidity deployment positioned the company for a rising-rate environment. However, modeled 12-month net interest income sensitivity was -4.35% under a 200-basis-point rate decline and +3.33% under a 200-basis-point increase, within Board-approved tolerances.
- The allowance reflected loan growth and uncertainty linked to the Russia-Ukraine conflict, inflation, supply-chain pressures, and monetary policy; management used qualitative adjustments for risks not fully reflected in its baseline economic forecast.
- Key cited credit concentration and commercial real estate risks, changing interest rates, liquidity and funding access, cybersecurity and operational risks, regulatory developments, climate-related requirements, litigation, and execution of strategic initiatives as risks to results.
- Legal proceedings arise in the ordinary course. Management did not expect known matters, individually or collectively, to have a material adverse effect on financial condition, but noted outcomes could exceed reserves or materially affect a particular period.
- Maximum potential undiscounted payments under reported guarantees totaled $17.349 billion, with $251 million of liabilities recorded; management assessed payment/performance risk as low. The FNMA commercial mortgage recourse arrangement covered $21.5 billion of unpaid principal, with a $6.570 billion stated maximum potential payment.
- The Board declared a quarterly common dividend of $0.195 per share. Share repurchases during the quarter were limited to employee equity compensation programs. Key reported no material disruption or customer harm from the heightened cyber threat environment to date.
Most important facts for investors to verify
- Whether revenue, earnings, and the cash efficiency ratio improve toward management’s stated targets in subsequent quarters.
- Whether loan growth and rising rates support net interest income and margin without materially increasing funding costs or credit risk.
- Whether inflation, geopolitical developments, and economic conditions lead to further allowance increases or higher charge-offs, particularly in commercial and real estate exposures.
- How unrealized securities and hedge losses affect AOCI, tangible capital, and flexibility to return capital.
- Deposit trends, liquid asset levels, wholesale funding needs, and the availability and cost of contingent borrowing capacity.
- Developments in litigation, guarantee and recourse exposures, LIBOR transition, and regulatory or cybersecurity requirements.