KeyCorp (NYSE: KEY) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unless otherwise noted, amounts are in U.S. dollars. Results are for continuing operations unless stated otherwise.
Business context and financial performance
KeyCorp is a regional bank holding company operating through Consumer Bank and Commercial Bank segments. Q1 reflected higher interest rates and loan balances, alongside deposit pressure, higher funding costs, weaker noninterest income, and increased credit-loss provisioning.
- Earnings: Net income attributable to Key was $312 million, versus $448 million a year earlier. Continuing-operations income attributable to common shareholders was $275 million, or $0.30 per diluted share, compared with $420 million, or $0.45.
- Revenue and margin: Taxable-equivalent net interest income was $1.106 billion, up $86 million year over year; net interest margin was 2.47%, up one basis point. GAAP net interest income was $1.099 billion. Total taxable-equivalent revenue was $1.714 billion, up from $1.696 billion.
- Noninterest income and expenses: Noninterest income fell to $608 million from $676 million. Noninterest expense rose to $1.176 billion from $1.070 billion. The cash efficiency ratio increased to 68.0% from 62.4%.
- Credit costs: Provision for credit losses was $139 million, versus $83 million. Net charge-offs were $45 million, or 0.15% of average loans, compared with $33 million, or 0.13%. The allowance for loan and lease losses was $1.380 billion, 1.15% of period-end loans; total allowance for credit losses, including off-balance-sheet exposures, was $1.656 billion.
- Cash flow: Operating activities provided $718 million; investing activities used $7.336 billion; financing activities provided $6.515 billion. Cash and due from banks decreased $103 million to $784 million during the quarter.
- Balance sheet and funding: Total assets were $197.5 billion, loans $120.0 billion, and deposits $144.1 billion at quarter-end. Long-term debt was $22.8 billion; wholesale funding totaled $34.2 billion. Average deposits were $143.4 billion, down $6.8 billion year over year.
- Capital and liquidity: Common Equity Tier 1 was 9.07%; total risk-based capital was 12.82%. Available contingent liquidity was $76.9 billion. Estimated uninsured deposits were $63.3 billion, or 44% of deposits; about $13.7 billion of uninsured deposits were collateralized by government-backed securities.
Material changes versus comparable periods
- Continuing-operations income attributable to common shareholders declined from $420 million to $275 million, despite higher net interest income. Higher provision, lower noninterest income, and higher expenses weighed on earnings.
- Average loans increased $16.1 billion year over year to $119.8 billion, while average deposits declined $6.8 billion. Higher interest rates lifted asset yields but also increased deposit and borrowing costs.
- Nonperforming loans increased to $416 million from $387 million at year-end; nonperforming assets rose to $447 million from $420 million. The filing attributed the quarterly NPA increase primarily to two healthcare-related loans affected by lingering pandemic impacts.
- Unrealized losses on available-for-sale securities were $5.686 billion at March 31, versus $6.437 billion at year-end. Accumulated other comprehensive loss improved to $5.474 billion from $6.295 billion, including quarterly other comprehensive income of $821 million.
- Commercial Bank net income declined to $264 million from $284 million; Consumer Bank net income increased to $81 million from $71 million.
Outlook, management commentary, and risks
- 2023 expectations versus 2022: Average loans up 6%–9%; average deposits flat to down 2%; taxable-equivalent net interest income down 1%–3%; noninterest income down 1%–3%; noninterest expense relatively stable (±2%); net charge-offs to average loans 25–30 basis points; effective tax rate 20%–21%.
- Long-term targets include a cash efficiency ratio of 54%–56%, net charge-offs of 0.40%–0.60% through a credit cycle, and return on average tangible common equity of 16%–19%. Q1 return on average tangible common equity was 13.2%.
- Management cited $64 million of pretax expense-action costs in Q1, including $36 million in severance and $28 million in other costs, and said actions were intended to keep 2023 expenses relatively stable while preserving investment capacity.
- Management described economic uncertainty, inflation, higher rates, slowing growth, and pressure on real estate values. The credit forecast assumed slow growth and a roughly 9% decline in the national home price index during 2023; management cautioned that future loss estimates could vary considerably.
- Commercial and industrial loans were 51% of total loans and approximately 87% variable rate. Commercial real estate loans totaled $18.9 billion; office was 5% of that portfolio and 85% occupied. The filing identifies C&I concentration and CRE-market deterioration among material risk factors.
- Following bank failures, Key increased liquidity monitoring and cash held at the Federal Reserve. Moody’s affirmed KeyCorp and KeyBank ratings but changed their outlooks from stable to negative on April 21, 2023. A possible FDIC special assessment related to SVB and Signature failures, and potential new regional-bank capital, liquidity, stress-testing, resolution, or debt requirements, could affect results or operations.
- Key reported that its bank subsidiary met the regulatory “well capitalized” thresholds. It also disclosed an SEC record-keeping inquiry concerning business communications on unapproved electronic platforms; the company said it was cooperating. Management did not believe existing litigation would materially adversely affect financial condition, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether deposit balances, uninsured-deposit levels, and funding costs stabilize, and how wholesale funding evolves.
- Whether net interest income and margin meet the 2023 outlook as deposit pricing and client behavior change.
- Trends in criticized and nonperforming loans, charge-offs, credit-loss reserves, and CRE—including office and multifamily exposure.
- The ultimate amount and timing of any FDIC special assessment or new regulatory requirements, and any further credit-rating outlook changes.
- Progress toward expense targets after Q1’s $64 million of expense-action costs, and the path back toward long-term efficiency and return targets.
- Potential effects of the $5.686 billion of unrealized available-for-sale securities losses and the expected reclassification of about $609 million of after-tax cash-flow-hedge losses from AOCI to income over the next 12 months.