KeyCorp (KEY) — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; comparisons are primarily with Q3 2021 and, for balance-sheet amounts, December 31, 2021. KeyCorp operates Consumer and Commercial banking businesses. Financial statements are unaudited interim statements; the independent accountant conducted a review, not an audit.
Financial results and key metrics
| Metric | Q3 2022 | Comparable period |
|---|---|---|
| Net interest income (GAAP) | $1.196 billion | $1.016 billion in Q3 2021 |
| Net interest margin (taxable-equivalent) | 2.74% | 2.47% in Q3 2021 |
| Noninterest income | $683 million | $797 million in Q3 2021 |
| Noninterest expense | $1.106 billion | $1.112 billion in Q3 2021 |
| Provision for credit losses | $109 million expense | $107 million benefit in Q3 2021 |
| Net income attributable to Key common shareholders | $515 million; diluted EPS $0.55 | $618 million; diluted EPS $0.65 in Q3 2021 |
- Taxable-equivalent revenue was $1.886 billion, up from $1.822 billion year over year; management reported positive operating leverage for the quarter and revenue growth of 5% sequentially.
- Lower provision benefits versus the prior year and lower fee income outweighed the increase in net interest income. Investment banking and debt placement fees fell 34.5% year over year, reflecting slower capital-markets activity; cards and payments and consumer mortgage income also declined.
- For the first nine months, GAAP net interest income was $3.307 billion versus $3.038 billion; net income attributable to Key common shareholders was $1.443 billion versus $1.916 billion. Operating cash flow was $2.884 billion; investing cash flow was negative $10.351 billion and financing cash flow was positive $7.271 billion.
- Average loans were $114.4 billion, up $14.3 billion year over year; average deposits were $144.2 billion, down $2.7 billion.
Balance sheet, credit, capital and liquidity
- At September 30, loans were $116.2 billion, up from $101.9 billion at year-end 2021. Commercial loans rose 12.4% to $79.6 billion; consumer loans rose 18.0% to $36.6 billion. Commercial real estate loans totaled $18.7 billion, including $2.3 billion of construction loans; multifamily was the largest CRE property category.
- Deposits were $144.9 billion, down $7.7 billion from year-end 2021. Wholesale funding totaled $27.1 billion, versus $12.8 billion at year-end, as loan growth coincided with lower deposits. Long-term debt was $18.3 billion, up from $12.0 billion.
- Management reported a 81% loan-to-deposit ratio, $37.7 billion in liquid assets and unused secured borrowing capacity of $32.1 billion at the Federal Reserve Bank of Cleveland and $7.0 billion at the FHLB. KeyCorp held $3.3 billion in cash at quarter-end and said it was sufficient for projected obligations.
- Allowance for loan and lease losses was $1.144 billion, up $83 million from year-end. Q3 net charge-offs were $43 million, or 0.15% of average loans; nonperforming loans were $390 million, down from $454 million at year-end. Nonperforming assets were $419 million, down $70 million.
- Common Equity Tier 1 was 9.12%, Tier 1 capital 10.65%, total risk-based capital 12.74%, and leverage 8.92%. KeyBank met the regulatory definition of “well capitalized.” KeyCorp’s shareholders’ equity-to-assets ratio was 7.0%, down from 9.4% at year-end; tangible common equity-to-tangible assets was 4.3%, down from 6.9%.
- Accumulated other comprehensive loss widened to $6.257 billion from $586 million at year-end, largely reflecting unrealized securities and hedging losses amid market-rate changes. Available-for-sale securities had $6.293 billion of gross unrealized losses; management said these were principally market-related, had not been recognized in income, and it did not expect to need to sell the securities before recovery.
Outlook, management commentary and risks
- 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. Q3 cash efficiency was 58.0%; Q3 return on average tangible common equity from continuing operations was 21.2%.
- For the remainder of 2022, management expected average-loan net charge-offs of 15–25 basis points. The filing describes elevated risk of slower economic growth from inflation, tighter monetary policy and global supply-chain stress; the credit-loss forecast used a baseline of slow growth.
- The Board declared a quarterly common dividend of $0.195 per share and extended the existing authorization to repurchase up to $1.5 billion of common shares through Q3 2023. Q3 repurchases were limited to employee-plan activity. KeyBank issued $2.0 billion of bank notes in August; KeyCorp issued $600 million of preferred stock in August.
- Key identified credit concentration and CRE conditions, economic deterioration, interest-rate and funding sensitivity, cybersecurity and operational failures, regulation, litigation, and LIBOR transition as risks. The LIBOR transition remains a focus ahead of the cessation of U.S. LIBOR tenors after June 30, 2023.
- Legal proceedings arise in the ordinary course. Management did not expect them, individually or in aggregate, to materially adversely affect financial condition, but cautioned that outcomes could exceed reserves or materially affect a particular period. Guarantees had maximum potential undiscounted payments of $18.3 billion and recorded liabilities of $375 million; management assessed payment/performance risk as low.
- The FDIC’s October 2022 rule will increase assessment rates by two basis points beginning in 2023. Potential new resolution-resource requirements were under consideration; KeyCorp said it was Category IV and would not be covered unless the proposals were extended.
Most important facts for investors to verify
- Whether higher rates and loan growth continue to lift net interest income as deposit costs rise and deposit balances shift.
- Whether fee-income weakness, particularly investment banking, cards/payments and mortgage, persists, and whether expense growth remains controlled.
- How credit quality and reserve needs respond to slower growth, higher rates, CRE exposure and commercial-loan concentration; compare actual charge-offs with the 15–25 bp remainder-of-2022 expectation.
- How deposit trends, wholesale funding costs, liquidity resources and regulatory capital evolve, especially given the decline in tangible common equity and substantial AOCI losses.
- Whether securities-related unrealized losses remain recoverable without forced sales, and whether dividend and repurchase plans remain consistent with capital and liquidity needs.