KeyCorp 2024 Q3 10-Q Filing Summary
Business Context and Reporting Period
This report covers KeyCorp's operations for the quarterly period ended September 30, 2024. KeyCorp operates primarily through two segments: Consumer Bank and Commercial Bank. The quarter was defined by a strategic minority investment from Scotiabank and a significant repositioning of the investment securities portfolio to improve yields.
Key Financial Metrics
| Metric | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 |
|---|---|---|---|---|
| Net Income (Loss) | $(410) million | $303 million | $83 million | $902 million |
| Diluted EPS | $(0.47) | $0.29 | $(0.03) | $0.86 |
| Net Interest Income (TE) | $964 million | $923 million | $2.75 billion | $3.02 billion |
| Net Interest Margin (TE) | 2.17% | 2.01% | 2.08% | 2.20% |
| Noninterest Income | $(269) million | $643 million | $1.01 billion | $1.86 billion |
| Noninterest Expense | $1.09 billion | $1.11 billion | $3.32 billion | $3.36 billion |
| Provision for Credit Losses | $95 million | $81 million | $296 million | $387 million |
| Total Assets | $189.8 billion | $192.7 billion | N/A | N/A |
| Total Loans | $105.3 billion | $117.6 billion | N/A | N/A |
| Total Deposits | $150.4 billion | $144.8 billion | N/A | N/A |
| Common Equity Tier 1 Ratio | 10.8% | 10.0% | N/A | N/A |
Material Changes vs. Prior Period
- Net Loss Driven by Securities Sale: The company reported a net loss of $410 million for Q3 2024, compared to net income of $303 million in Q3 2023. This reversal was primarily due to a $935 million pre-tax loss on the sale of available-for-sale securities as part of a strategic portfolio repositioning. Excluding this loss, the company would have reported a tax benefit rather than an expense.
- Net Interest Income Growth: Net interest income (TE) increased $41 million year-over-year to $964 million, and the net interest margin expanded 16 basis points to 2.17%. This was driven by reinvesting proceeds from maturing securities into higher-yielding assets and a shift from wholesale borrowings to lower-cost deposits, partially offset by declining loan balances.
- Loan Portfolio Contraction: Average loans decreased $11.4 billion to $106.2 billion, reflecting planned balance sheet optimization and tepid client demand. Commercial loans declined $8.5 billion, while consumer loans declined $2.9 billion.
- Deposit Growth: Average deposits increased $2.9 billion to $147.8 billion, with growth in both consumer and commercial deposits.
- Credit Quality: Net loan charge-offs increased to $154 million (0.58% of average loans) from $71 million in the prior year. Approximately $80 million of these charge-offs related to three large credits in the consumer goods and equipment manufacturing sectors.
Guidance, Outlook, and Strategic Developments
- Scotiabank Investment: On August 12, 2024, KeyCorp entered an agreement for Scotiabank to make a strategic minority investment of approximately $2.8 billion (approx. 14.9% ownership). The first closing of $821 million occurred in August 2024. The final closing of approximately $2.0 billion is expected in Q1 2025, subject to Federal Reserve approval.
- Securities Repositioning: KeyCorp sold approximately $7.0 billion of low-yielding mortgage-backed securities (avg yield 2.3%) and $3.0 billion of U.S. Treasuries. Proceeds were reinvested in October into securities with an average yield of approximately 4.95%.
- Full Year 2024 Guidance:
- Average Loans: Down 7% to 8%.
- Average Deposits: Up 1% to 2% (Client deposits up 3% to 4%).
- Net Interest Income (TE): Down 2% to 5%.
- Noninterest Income: Up 6%+ (Excluding the $918 million securities loss).
- Noninterest Expense: Up ~2% (Excluding specific FDIC assessments and efficiency expenses).
- Net Charge-offs: 35 to 40 basis points of average loans.
- Effective Tax Rate: ~13% (Excluding the securities loss impact).
- Capital Position: The company ended the quarter with a Common Equity Tier 1 ratio of 10.8%, up 100 basis points from a year ago, bolstered by the Scotiabank investment and balance sheet repositioning.
Investor Verification Checklist
- Securities Loss Impact: Verify the non-GAAP reconciliation to understand earnings performance excluding the $935 million one-time securities loss.
- Scotiabank Closing Timeline: Monitor the status of the second closing of the Scotiabank investment, expected in Q1 2025, and its impact on capital ratios and earnings volatility due to fair value accounting.
- Commercial Real Estate (CRE) Exposure: Review the composition of the CRE portfolio, specifically non-owner-occupied properties (80% of CRE loans), and monitor for further credit migration given market pressures.
- Deposit Cost Trends: Assess the sustainability of deposit growth and the trajectory of deposit costs as the company shifts funding mix away from wholesale borrowings.
- FDIC Special Assessments: Track the impact of ongoing FDIC special assessments related to the SVB and Signature Bank failures, which resulted in incremental expenses in 2024.