KeyCorp — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. KeyCorp is a regional bank holding company operating through Consumer Bank and Commercial Bank. The interim financial statements were reviewed by Ernst & Young; the review is not an audit.
Financial performance and position
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Net interest income, GAAP | $981 million | $977 million in Q1 2019 |
| Net interest margin, taxable-equivalent | 3.01% | 3.13% in Q1 2019 |
| Noninterest income | $477 million | $536 million in Q1 2019 |
| Noninterest expense | $931 million | $963 million in Q1 2019 |
| Provision for credit losses | $359 million | $62 million in Q1 2019 |
| Continuing income attributable to Key common shareholders | $118 million; $0.12 per share | $386 million; $0.38 per share in Q1 2019 |
| Net income attributable to Key | $146 million | $407 million in Q1 2019 |
| Cash efficiency ratio | 62.3% | 61.9% in Q1 2019 |
- Taxable-equivalent revenue was $1.466 billion, down from $1.521 billion a year earlier. Earnings declined sharply as the credit-loss provision rose and market-related losses weighed on noninterest income.
- Other income was a loss of $88 million versus income of $10 million in Q1 2019. Management cited $92 million of market-related valuation adjustments; operating lease income also included an $8 million impairment charge.
- Q1 2020 operating cash flow was negative $173 million, versus positive $560 million in Q1 2019. Investing cash outflow was $9.722 billion, primarily reflecting loan growth; financing cash inflow was $10.028 billion, including deposit and borrowing growth. Cash and due from banks ended at $865 million.
- At March 31, total assets were $156.2 billion, loans $103.2 billion, deposits $115.3 billion, long-term debt $13.7 billion, and shareholders’ equity $17.4 billion. Compared with December 31, 2019, loans rose $8.6 billion and deposits rose $3.4 billion.
- Loans grew in part as commercial clients drew on credit lines: commercial and industrial loans increased $7.7 billion from year-end. Wholesale funding reached $20.8 billion, up from $13.5 billion at year-end.
- Liquidity: management reported approximately $50 billion of liquid assets and unused borrowing capacity. Separately, the filing reports a $26.0 billion liquid-asset portfolio and $30.7 billion in unused secured borrowing capacity at the Federal Reserve Bank of Cleveland and FHLB. KeyCorp held $4.7 billion in cash.
- Capital ratios at quarter-end were 8.9% Common Equity Tier 1, 10.2% Tier 1, 12.2% total risk-based capital, and 9.8% leverage. The fully phased-in estimated CET1 ratio was 8.8%. All ratios exceeded applicable regulatory minimums; KeyBank was reported as well-capitalized under the prompt corrective action framework.
- The quarterly common dividend was $0.185 per share. Common-share repurchases were temporarily suspended on March 17 in response to the pandemic.
Changes, outlook, and key risks
- Credit reserves and accounting: Key adopted CECL on January 1, 2020, recording a $230 million after-tax-equivalent reduction to retained earnings (net of deferred taxes) and an initial $204 million increase in the continuing-operations loan allowance. By March 31, the continuing-operations allowance was $1.359 billion, up $459 million from year-end. The total provision included $339 million for loan losses and $20 million for off-balance-sheet exposures.
- Net charge-offs were $84 million, or 0.35% of average loans, compared with $64 million, or 0.29%, a year earlier. Nonperforming assets increased to $844 million from $715 million at year-end; the filing attributes much of the increase to one commercial credit transferred to OREO and notes that CECL brought certain previously excluded acquired loans into nonperforming disclosures.
- Commercial Bank net income fell to $70 million from $250 million in Q1 2019; Consumer Bank net income fell to $105 million from $168 million. Both segments recorded higher credit-loss provisions; Commercial Bank also faced lower market-sensitive revenue.
- COVID-19 materially affected the economic outlook, customer borrowing and relief requests, capital markets, and operations. Key withdrew its full-year 2020 financial outlook because the pandemic’s effects could not be estimated. Long-term targets were unchanged, including positive operating leverage, a 54%–56% cash efficiency ratio, and 16%–19% return on average tangible common equity.
- Management said it was assisting clients with Paycheck Protection Program applications, payment deferrals, and hardship requests. Branches shifted to drive-through and appointment service, and employees worked remotely where feasible.
- Credit exposures warrant attention: oil and gas represented about 2.6% of total loans; commercial portfolios also included travel/tourism, consumer-behavior-sensitive businesses, hotels, and leveraged lending. Management highlighted active surveillance and pandemic watchlists. The CECL estimate assumed a significant near-term slowdown and recovery beginning later in 2020, while acknowledging substantial uncertainty and possible further reserve increases.
- Other risks include interest-rate and market volatility, funding costs and credit-line draws, remote-work cybersecurity and fraud, third-party service disruptions, regulatory change, and litigation. The filing states that legal matters are not expected to have a material adverse effect on consolidated financial condition, but outcomes could affect results in an individual period.
Important facts for investors to verify
- How subsequent economic conditions, borrower relief, and government programs affect credit quality, CECL reserves, charge-offs, and nonperforming assets.
- Whether the large Q1 commercial loan growth and higher credit-line utilization persist, and how exposures to oil and gas, travel, hotels, and other stressed sectors perform.
- Whether market-related valuation adjustments and trading conditions reverse or continue to pressure noninterest income.
- How funding needs, deposit trends, borrowing costs, and capital ratios evolve; also confirm the status of the suspended share repurchase program and dividend.
- Review the detailed cash-flow statements, loan and allowance notes, capital disclosures, contingent guarantees, and subsequent filings for updates.