KeyCorp net income declines in second quarter amid pandemic

KeyCorp (NYSE: KEY) — parent of KeyBank, which ranks No. 2 in deposit market share in the 16-county Central New York region — reported that its net income from continuing operations fell to $159 million, or  16 cents a share, in the second quarter from $403 million, or 40 cents per share, in the year-ago quarter. 

Key’s earnings per share this quarter beat the consensus analyst estimate of 15 cents, according to Zacks Equity Research.

The banking company’s financial results reflected the current expected credit losses (CECL) accounting methodology, as well as the impact of the COVID-19 crisis.

Key’s total revenue grew nearly 7 percent year over year to $1.72 billion, topping the Zacks consensus estimate of $1.6 billion.

“We are pleased with Key’s second quarter results, which demonstrated the resiliency of our team and business, the strength of our balance sheet, and our strong risk-management practices. Our results also reflected a significant build in our allowance for loan and lease losses, with our provision for credit losses exceeding net charge-offs by $386 million,” Chris Gorman, chairman and CEO of Cleveland, Ohio–based Key, said in the banking company’s July 22 earnings report. “Importantly, we generated positive operating leverage versus the year-ago quarter and a record level of pre-provision net revenue. Our results included strong balance-sheet trends, with double-digit growth in both loans and deposits. Our fee businesses also benefitted from broad-based growth, driven by strength in capital markets-related income, cards and payments, and consumer mortgage. Expenses this quarter reflected higher production-related variable costs, expenses related to our payments business, and COVID-19 related expenses…”

Gorman said KeyBank was “very active” in the Paycheck Protection Program, processing more than 40,000 loans, providing more than $8 billion of funding to clients.

Income

Key’s taxable-equivalent net interest income was $1 billion in the second quarter of 2020, compared to taxable-equivalent net interest income of $989 million in the second quarter of 2019. The increase in net interest income reflects higher earning-asset balances partially offset by a lower net interest margin. The net interest margin was impacted by lower interest rates, a lag in deposit pricing as interest rates declined, and a change in balance-sheet mix, including elevated levels of liquidity and Key’s participation in the Paycheck Protection Program.

Compared to the second quarter of 2019, noninterest income increased by $70 million, led by a $47 million rise in consumer-mortgage income, driven by a record level of loan originations and related fees in the second quarter of 2020, Key noted. Additionally, cards and payments income increased $18 million related to prepaid-card activity and operating-lease income increased $16 million, led by gains from the sale of leveraged leases. These benefits were partially offset by a decline of $15 million in service charges on deposit accounts, the banking company said.

Expense

Key’s noninterest expense was $1 billion for the second quarter of 2020, a decrease of $6 million from the year-ago period. The second quarter of 2019 included notable items of $52 million, primarily personnel-related from Key’s efficiency initiatives, per the report. Excluding notable items in the year-ago period, expenses increased $46 million. The rise is primarily related to higher other expense, from $25 million of payments-related expenses incurred in the current period, as well as COVID-19-related costs related to steps that the banking company has taken to protect its employees.

Average loans were $107.9 billion for the second quarter of 2020, an increase of $17.2 billion compared to the year-prior period. Commercial loans increased $13.3 billion, reflecting growth from participation in the Paycheck Protection Program during the current quarter, as well as core broad-based growth in commercial and industrial loans and increased utilization compared to the year-ago period. Consumer loans increased $3.8 billion, driven by strength from its Laurel Road unit and Key’s consumer-mortgage business.

Key’s average deposits totaled $128 billion for the second quarter of 2020, an increase of $18.4 billion compared to the year-ago quarter, reflecting growth from consumer and commercial clients, partially offset by a decline in time deposits.

Credit losses

Key’s provision for credit losses was $482 million for the second quarter of 2020, compared to $74 million in the second quarter of 2019. The provision for credit losses reflects the adoption of a new accounting standard, often referred to as Current Expected Credit Losses (CECL), beginning in the first quarter of 2020. This framework requires that management estimate credit losses over the full remaining expected life and consider expected future changes in macroeconomic conditions, Key explained.

The provision for credit losses exceeded net charge-offs by $386 million. Net loan charge-offs in the second quarter of 2020 totaled $96 million, or 0.36 percent of average total loans. These results compare to $65 million, or 0.29 percent, for the second quarter of 2019. Key’s allowance for loan and lease losses was $1.7 billion, or 1.61 percent of total period-end loans as of June 30, 2020, compared to 0.97 percent as of June 30, 2019.

As of June 30, Key’s nonperforming loans totaled $760 million, which represented 0.72 percent of period-end portfolio loans. These results compare to 0.61 percent as of June 30, 2019. 

KeyCorp, which says its roots trace back 190 years to Albany, has assets of more than $171 billion. KeyBank has more than 1,000 branches in 15 states. It operates several dozen branches in Central New York.