KeyCorp (NYSE: KEY) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Figures are in U.S. dollars; financial amounts are generally in millions unless stated otherwise. The interim financial statements were reviewed, not audited.
Business context and financial performance
KeyCorp operates its Consumer Bank and Commercial Bank, with consumer and commercial lending, deposits, wealth services, mortgage servicing, and capital markets activities. Management said the quarter continued its focus on profitable growth, targeted client relationships, risk management, and shareholder returns.
| Metric | Q3 2021 | Comparable period / change |
|---|---|---|
| Net interest income (GAAP) | $1.016 billion | Up $16 million from Q3 2020 |
| Noninterest income | $797 million | Up $116 million from Q3 2020; investment banking fees rose 61% to $235 million |
| Noninterest expense | $1.112 billion | Up $75 million from Q3 2020, including higher personnel and incentive costs |
| Income from continuing operations attributable to Key | $643 million | Up from $424 million in Q3 2020 |
| Net income attributable to Key common shareholders | $618 million; diluted EPS $0.65 | $401 million and diluted EPS $0.41 in Q3 2020 |
| Taxable-equivalent net interest margin | 2.47% | 2.62% in Q3 2020 |
| Cash efficiency ratio (non-GAAP) | 60.2% | 60.6% in Q3 2020; above the 54%–56% long-term target |
For the first nine months, net income attributable to Key was $1.996 billion versus $761 million in 2020; common shareholders’ net income was $1.916 billion versus $681 million. Taxable-equivalent revenue was $5.345 billion, up from $4.870 billion. Return on average tangible common equity was 19.43% for the nine months, within the 16%–19% long-term target range on a rounded basis.
Credit, balance sheet, cash flow, and capital
- Credit: The Q3 provision for credit losses was a $107 million benefit, including a $136 million reserve release, compared with $160 million of provision expense a year earlier. Net charge-offs were $29 million, or 0.11% of average loans, versus $128 million and 0.49%. The allowance for loan and lease losses was $1.084 billion, down from $1.626 billion at year-end 2020. Nonperforming assets declined to $599 million from $937 million.
- Loans and deposits: Period-end loans were $98.6 billion, down from $101.2 billion at December 31, 2020; deposits were $151.9 billion, up from $135.3 billion. The loan-to-deposit ratio was 66.5%. Average Q3 deposits rose $12.0 billion year over year, while average loans fell $4.8 billion.
- Liquidity and debt: Liquid assets totaled $49.9 billion, with additional unused secured borrowing capacity of $23.1 billion at the Federal Reserve Bank of Cleveland and $11.8 billion at the FHLB. KeyCorp reported $2.6 billion of parent-company cash. Long-term debt was $13.2 billion, compared with $13.7 billion at year-end 2020; wholesale funding totaled $14.2 billion.
- Capital and distributions: Common Equity Tier 1 was 9.6% (9.56% in the detailed table), above the 7.0% regulatory minimum including the stress capital buffer. KeyBank met the “well capitalized” PCA thresholds. Key repurchased $593 million of common shares in Q3, including $468 million through an accelerated share repurchase, and paid a $0.185 per-share dividend. The Board’s current repurchase authorization was up to $1.5 billion through Q3 2022.
- Cash flow, nine months: Operating activities provided $1.163 billion; investing activities used $16.069 billion; financing activities provided $14.578 billion. Cash and due from banks decreased $328 million to $763 million. Investing outflows included securities purchases and increased short-term investments; financing inflows primarily reflected deposit growth.
Material changes and notable items
- Q3 revenue growth was driven by record investment banking fees and stronger commercial mortgage servicing and deposit service-charge income. Investment banking activity benefited from strong equity and M&A markets.
- Net interest income rose year over year, but margin declined, reflecting low rates and a balance sheet with elevated liquidity; lower deposit costs and PPP loan forgiveness fees partly offset these pressures.
- Key sold a $3.3 billion indirect auto loan portfolio and purchased $2.8 billion of senior notes from a securitization backed by the sold loans. Management said the transaction reduced potential credit and reinvestment risk. Consumer loans were also supported by mortgage and Laurel Road growth.
- Available-for-sale securities increased to $40.6 billion from $27.6 billion at year-end 2020; total securities reached $49.0 billion. Q3 other comprehensive loss was $195 million, principally reflecting unrealized losses on available-for-sale securities and derivatives.
- For the nine months, reported operating cash flow was $1.163 billion versus $727 million in 2020, while the credit-loss provision shifted from $1.001 billion of expense to a $422 million benefit.
Outlook, risks, and contingencies
Management reported positive operating leverage for Q3 and targeted net charge-offs below 20 basis points of average loans for the remainder of 2021. Long-term targets include a 54%–56% cash efficiency ratio, net charge-offs of 0.40%–0.60% through a credit cycle, and return on average tangible common equity of 16%–19%. Management described the economic outlook as strong but noted Delta-variant effects on supply chains and consumer confidence; it used Moody’s August 2021 consensus forecast in estimating credit losses.
- Key identified commercial credit concentration and exposure risks, including commercial real estate, energy, leveraged lending, and industries affected by the pandemic. It continued active portfolio surveillance. Active COVID-19 payment relief was $173 million at quarter-end, while total loans that had received relief were $3.148 billion.
- Newly highlighted labor shortages and supply-chain constraints could disrupt clients’ operations and repayments, while also increasing Key’s hiring and wage costs. Other disclosed risks include cybersecurity and operational failures, regulatory change, interest-rate movements, LIBOR transition, funding access, and adverse economic conditions.
- Legal proceedings arise in the ordinary course. Key said it did not expect known matters to have a material adverse effect on financial condition, while cautioning that outcomes could exceed reserves or materially affect results in a particular period.
- Guarantees had maximum potential undiscounted payments of $16.542 billion and recorded liabilities of $179 million. Management assessed payment/performance risk as low; the maximum amounts are contractual exposure measures, not expected losses.
- Interest-rate simulations were within Board-approved tolerances. The modeled 12-month net interest income impact was negative 4.06% under a 200-basis-point decline and positive 5.50% under a 200-basis-point increase. Actual results may vary with rates, balance-sheet mix, customer behavior, and model assumptions.
Important facts for investors to verify
- Whether reserve releases and exceptionally low charge-offs remain supportable as economic forecasts, borrower assistance, and pandemic effects evolve.
- Whether investment banking, mortgage servicing, and other fee income can sustain revenue growth amid market and interest-rate changes.
- The final economics and share count under the ASR, remaining capacity under the $1.5 billion authorization, and the effect of buybacks on capital ratios.
- Credit quality and risk concentrations, including commercial real estate, commercial and industrial exposures, loan modifications, and recourse or other guarantee obligations.
- Progress and potential operating or financial effects of the LIBOR transition, labor shortages, supply-chain constraints, and evolving regulatory requirements.