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Text: Joining me for the call today are Don Kimble, our chief financial officer; and Mark Midkiff, our chief risk officer.
But before we get into the details of the quarter, I want to share a couple of broader and contextual comments.
I am very proud of the way our team continues to navigate the pandemic and related economic downturn.
Their dedication, combined with our investments in talent and digital capabilities, continue to serve the company, our clients, our communities, and our shareholders well.
Throughout 2020, we successfully executed what I call our dual mandate.
By that, I mean responding to the pandemic, which is a real humanitarian and economic crisis, while continuing to position Key for both growth and success.
We have taken countless steps to ensure that our teammates and our clients are both safe and well-served.
Additionally, we've provided billions of dollars in credit to our clients.
In 2020, we originated more than 43,000 loans amounting to $8 billion through the first round of the Paycheck Protection Program.
In fact, we are currently assisting our clients through the second round of the Paycheck Protection Program as we speak.
As part of our national community benefits plan, we provided billions of dollars in support to our communities.
This included affordable housing, home lending and small business lending in low and moderate-income communities, transformative philanthropy, and renewable energy financing.
Our commitment also includes programs to advance social justice and economic inclusion across all the communities we serve.
I am now turning to Slide 3.
Getting back to our performance in the fourth quarter, we achieved a record level of revenue for both the quarter and the year.
The growth in net interest income and fee income.
Net interest income was up almost 4% from the prior quarter with an 8-basis-point increase in our net interest margin.
Fee income, also a record, up double -- double digits for both the prior quarter and the year-ago period.
We continue to benefit from investments that we have made across our company, which drove both fee income and balance sheet growth.
Let me touch on three specific areas.
We achieved record volume in the fourth quarter with $2.5 billion in funded loans.
For the full year, our consumer mortgage originations were $8.3 billion, up 90% from the prior year.
This drove both balance sheet growth, as well as a 179% increase in fee income.
Approximately one-half of our originations last year were purchase mortgages.
Our pipelines remain strong and we expect to continue to both grow and take share.
The second area I will highlight is investment banking.
This is an area where we have invested in talent and made targeted acquisitions to enhance our capabilities, including areas such as healthcare and technology.
In the fourth quarter, we generated $243 million in fees, which represents a record quarter.
We enjoyed broad-based growth across the platform with particular strength in M&A and loan syndications.
2020 was a record year for investment banking and debt placement fees.
Our investment banking pipelines remain strong.
We believe this business will continue to be a growth engine for us in the future.
The third area is Laurel Road and, more broadly, the investments we have made in digital across our company.
Laurel Road continues to originate high-quality loans that provide us with an opportunity to build broader digital relationships with healthcare professionals.
Last year, Laurel Road originated over $2.3 billion in loans.
At the end of March, we will launch our digital bank, serving the healthcare segment, expanding our consumer franchise nationally.
This launch will broaden our offering for Laurel Road clients to include deposits, additional lending products, and other value-added services.
We believe that both Laurel Road and consumer mortgage will continue to be relationship-based growth engines for our consumer business.
Our expenses this quarter were elevated.
They were elevated due to higher production-related incentives, severance, and the funding of our philanthropic foundation.
Additionally, COVID-related expenses and costs associated with our prepaid card also remained elevated again this quarter.
Don will cover the outlook in his remarks, but we expect expenses to come down in 2021 while concurrently investing in talent and digital capabilities.
This year, we will also be accelerating the pace of branch closures.
We expect to consolidate over 70 branches, representing 7% of our network.
Most of these closures taking place in the first half of the year.
Our decisions are driven by client behavior as more activity continues to move to our digital channels.
It's also informed by our robust analytics.
We expect limited client attrition as a high percentage of the impacted branches are located within two miles of another Key facility.
Importantly, we expect to continue to grow our retail business while reducing operating expenses and improving overall profitability.
Credit quality remained strong this quarter with net charge-offs of 53 basis points within our targeted over the cycle range.
Additionally, nonperforming loans declined by almost $50 million this quarter.
We will continue to support our clients while maintaining our moderate risk profile and concurrently positioning the company to perform well through the business cycle.
Finally, we have maintained our strong capital position while continuing to return capital to our shareholders.
In the fourth quarter, our Common Equity Tier 1 ratio increased 30 basis points to 9.8%, which is above our targeted range of 9% to 9.5%.
The results of our recent stress tests af -- affirm that Key is a different company today with loss rates and loss-absorbing capital among the best in our peer group.
Our strategic positioning allows us to continue to execute against each of our capital priorities: supporting organic growth, paying dividends, and, of course, share repurchases.
Last week, our board of directors authorized a new share repurchase program of up to $900 million over the next three quarters.
We also approved our first-quarter common stock dividend of $18.5 a share.
In closing, despite the challenging environment of the last year, we were able to support our clients, invest in and grow our businesses while maintaining our strong risk practices.
Our success was driven by our dedicated team, the strength of our business model, and our relentless focus on executing our strategy.
I am confident in Key's future.
We are positioned to succeed and continue to deliver on all of our commitments.
I'm now on Slide 5.
As Chris said, it was a very strong quarter for us with record net income from continuing operations of $0.56 per common share, up 37% from the prior quarter and 24% from the prior year-ago period.
Return on average tangible common equity for the quarter was over 16%, up over 400 basis points from the third quarter.
Turning to Slide 6, total average loans were $102 billion, up 9% from the fourth quarter of last year, driven by growth in both commercial and consumer loans.
Commercial loans reflect an increase of over $7.5 billion from the PPP loans.
Consumer loans benefited from the continued growth from Laurel Road and, as Chris mentioned, strong performance from our consumer mortgage business.
Laurel Road originated $590 million of loans this quarter and $2.3 billion for the full year, up over 20% from the full-year 2019.
We also generated ano -- another record, $2.5 billion of consumer mortgage loans in the quarter, bringing the total for the year to $8.3 billion.
The investments we have made in these areas continue to drive results and, importantly, add high-quality loans to our portfolio.
Linked-quarter average loan balances were down 3%, reflecting pay downs from a heightened commercial loan draws, as well as a small reduction in PPP balances related to initial forgiveness.
Line utilization rates are at the pre-pandemic levels given the strong liquidity levels in the -- in the environment.
Importantly, we have remained disciplined with our credit underwriting and have walked away from business that does not meet our moderate risk profile.
We remain committed to performing well through the business cycle and we manage our credit quality with this longer term perspective.
Continue on the Slide 7.
Average deposits totaled $136 billion for the fourth quarter of 2020, up $23 billion or, 21%, compared to the year-ago period and up 0.6% from the prior quarter.
The linked-quarter increase reflected a broad-based commercial growth, as well as growth from our -- from higher consumer balances.
The growth was offset by a continued and expected decline in time deposits.
Growth from the prior year was driven by both consumer and commercial clients.
The total interest-bearing deposit costs came down 11 basis points from the third quarter of 2020, exceeding our guidance of a 6 to 9-basis-point decline, continue to have a strong stable core deposit base with consumer deposits accounting for over 60% of the total deposit mix.
Turning to Slide 8.
Taxable equivalent net interest income was $1.043 billion for the fourth quarter of 2020, compared to $987 million a year ago and just over $1 billion from the prior quarter.
Our net interest margin was 2.70% for the fourth quarter of 2020, compared to 2.98% for the same period last year and 2.62% from the prior quarter.
Both net interest income and net interest margin were meaningfully impacted by the significant growth in our balance sheet compared to the year-ago period.
The larger balance sheet benefited net interest income but reduced the net interest margin due to significant increase in liquidity driven by strong deposit inflows.
Compared to the prior quarter, net interest income increased $37 million, and the margin improved by 8 basis points.
The increase in both net interest income and net interest margin quarter over quarter are largely due to the lower interest-bearing deposit cost and the higher loan fees from PPP forgiveness.
We saw the average rate paid on interest-bearing deposits declined 11 basis points from the prior quarter.
The forgiveness of the PPP loans accelerated about $28 million of additional fee recognition this quarter.
These were partially offset by continued elevated liquidity levels, which had a 5-basis-point negative impact on the margin.
Moving to Slide 9.
Our fee-based businesses hit all-time highs in the fourth quarter.
Noninterest income was $802 million for the fourth quarter of 2020, compared to $651 million for the year-ago period and $681 million for the third quarter.
Compared to the year-ago period, noninterest income increased $151 million.
The primary driver was a record quarter for investment banking and debt placement fees, which reached $243 million, up $62 million from the year-ago period.
Stronger M&A and loan syndication fees drove most of the increase this quarter.
This business also had a record year with $661 million of total fees.
Record mortgage originations drove consumer mortgage fees this quarter, which were up $22 million from the fourth quarter of '19.
Cards and payments income also increased $30 million related to higher prepaid card activity from the state government support programs.
Compared to the third quarter, noninterest income increased by $121 million.
The largest driver of the quarterly increase was once again the record quarter for investment banking, which was up $97 million.
Commercial mortgage servicing fees also had a strong quarter, up $14 million.
I'm now turning to Slide 11 -- excuse me, Slide 10.
Total noninterest expense for the quarter was $1.128 billion, compared to $980 million last year and $1.037 billion in the prior quarter.
The increase from the prior year is primarily in personnel costs, driven by higher production-related incentive from our record fee production, as well as higher severance costs.
Year over year, payments-related costs reported and other expense were $40 million higher, driven by higher prepaid activity, and we incurred COVID-19 related expenses to ensure the health and safety of our teammates.
Compared to the prior quarter, noninterest expense increased $91 million.
The increase was largely due to $40 million of higher production-related incentives, $22 million of severance, $12 million of higher stock-based compensation related to the share price, and a $15 million additional contribution to our charitable foundation.
Marketing expense was also up $8 million from the prior quarter.
Turning to Slide 11.
Overall, credit quality remains strong.
For the fourth quarter, net charge-offs were $135 million or 53 basis points of average loans.
Slightly below our guidance range.
Our provision for credit losses was $20 million.
This was determined under the CECL methodology and based on our continued strong credit metrics and leading indicators, as well as our outlook for the overall economy, credit migration, and loan production.
Nonperforming loans were $785 million this quarter, or 78 basis points of period in loans, compared to $834 million, or 81 basis points, from the prior quarter.
Additionally, 30 to 89 de -- day delinquencies actually improved quarter over quarter with a 9-basis-point decrease while the 90-day plus category remained relatively flat.
We've continued to monitor the level of assistance request we receive from our customers.
Over the past quarter, the number of requests for loan forbearance has decreased dramatically.
As of December 31, loan subject to forbearance terms were less than $600 million, down from a peak of $5.2 billion, equating to about 0.5% of our outstanding balances.
One mo -- one more observation this quarter, and as Chris mentioned earlier, in late December, the results of the most recent stress test results were published.
Key results reinforce the commitments we have been making over the past several years that we are a different company with a better risk profile than Key showed through the -- the Great Recession.
Our stress credit losses for the -- from the test were peer leading.
We've been managing the company over the last decade to outperform during challenging times and believe we have positioned the company to achieve this.
Turning to Slide 12.
We updated our disclosure that highlights certain pre -- portfolios that are receiving greater focus in this environment.
These areas represent a small percentage of the total loan balances.
Each relationship in these focus areas continues to be subject to active reviews and enhanced monitoring.
Importantly, as a group, they continue to perform consistent with our expectations.
Now in the Slide 13.
Key's capital position remains an area of strength.
We ended the fourth quarter with a Common Equity Tier 1 ratio of 9.8%, up 30 basis points from 9.5% in the third quarter.
This places us above our target range of 9% to 9.5%.
This provides us with the sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders.
Importantly, the results of the recent stress tests support and highlight our strong credit profile and loss absorbing capital.
Last week, our board of directors approved a new share repurchase authorization of up to $900 million for the next three quarters.
They also approved our first-quarter 2021 common dividend of $18.5 per share.
On Slide 14, we provide our full-year 2021 outlook.
This builds on our performance in 2020 and reflects our expectation that we will deliver positive operating leverage for the year.
Guidance range definitions are provided at the bottom of the slide.
Average loans are expected to be relatively stable.
Although at this point, I would expect a little downward bias to this range.
This reflects participation in the next round of PPP and continued growth in our consumer loan portfolio from both Laurel Road and our consumer mortgage business.
We expect deposits to be up low single-digits and we will continue to benefit from our low-cost deposit base.
Net interest income should be relatively stable.
Our net interest income will benefit from our higher loan fees related to PPP forgiveness and continued deployment of some of the excess liquidity, offset by the ongoing impact of low rates.
Noninterest income should be up low single-digits, reflecting growth in, but most of our core fee-based businesses.
As Chris mentioned, noninterest expense should be down in 2021, somewhere in the low single-digit range.
We will continue to benefit from our continuous improvement efforts and accelerated branch closures.
We also plan to continue to invest in talent and to stay at the forefront of our digital offerings.
Moving on the credit quality.
Net charge-off to average loan should be in the 50 to 60-basis-point range, which is consistent with our through the cycle range of 40 to 60 basis points.
And our guidance for our GAAP tax rate should be around 19% for the year.
Our guidance also assumes some variability over the course of the year.
First quarter will reflect normal seasonality, including a lower day discount and an increase in personnel expense, driven by heightened employee benefit costs.
Finally, shown at the bottom of slide, our long-term targets.
As Chris said, we expect to deliver positive operating leverage for 2021.
We also maintain our moderate risk profile and over time continue to improve our efficiency and overall returns.
I'll close with where Chris started, recognizing the effort of our team to support our clients and to deliver strong results for both the quarter and the year despite the challenging environment.
We are well-positioned as we head into 2021 and plan to deliver on our commitments to all of our stakeholders.

user
compname reports record fourth quarter 2020 net income of $549 million, or $0.56 per diluted common share.
q4 earnings per share $0.56 from continuing operations.
announced new common share repurchase authorization of up to $900 million.
provision for credit losses was $20 million for q4 of 2020, compared to $109 million for q4 of 2019.
taxable-equivalent net interest income was $1.043 billion for q4 2020.
net loan charge-offs for q4 of 2020 totaled $135 million comparde to $99 million for q4 of 2019.

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