KeyCorp 2018 Form 10-K Summary
Business context and reporting period
KeyCorp is a Cleveland-based bank holding company operating primarily through KeyBank. It provides consumer and commercial banking, investment banking, leasing, wealth management and related services through Key Community Bank and Key Corporate Bank. The filing reports the fiscal year ended December 31, 2018; fourth-quarter results are also summarized. Amounts below are in U.S. dollars unless noted.
Financial results and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets, year-end | $139.6 billion | $137.7 billion |
| Loans, year-end | $89.6 billion | $86.4 billion |
| Deposits, year-end | $107.3 billion | $105.2 billion |
| Net interest income, GAAP | $3.909 billion | $3.777 billion |
| Net interest margin, taxable-equivalent | 3.17% | 3.17% |
| Noninterest income | $2.515 billion | $2.478 billion |
| Noninterest expense | $3.975 billion | $4.098 billion |
| Continuing-operations income attributable to Key common shareholders | $1.793 billion; $1.72 per share | $1.219 billion; $1.13 per share |
| Net income attributable to Key common shareholders | $1.800 billion; diluted EPS $1.71 | $1.226 billion; diluted EPS $1.13 |
| Effective tax rate | 15.6% | 33.0% |
| Long-term debt, year-end | $13.732 billion | $14.333 billion |
Taxable-equivalent revenue was a record $6.455 billion, up 2.3%; GAAP net income attributable to Key was $1.866 billion. Return on average assets was 1.36%, return on average common equity 12.88%, and return on average tangible common equity 16.22%. The non-GAAP cash efficiency ratio improved to 60.0% from 63.5%.
Operating cash flow was $2.506 billion, investing cash flow was negative $2.482 billion, and financing cash flow was negative $17 million. Cash and due from banks ended the year at $678 million. Separately, the liquid asset portfolio was $24.2 billion, and KeyCorp reported $3.2 billion in cash for parent-company liquidity. Deposits were the primary funding source; wholesale funds were $14.6 billion versus $15.3 billion a year earlier. The loan-to-deposit ratio was 85.6%.
Capital ratios at year-end included Common Equity Tier 1 of 9.93%, Tier 1 risk-based capital of 11.08%, total risk-based capital of 12.89%, and leverage of 9.89%. KeyCorp’s estimated fully phased-in CET1 ratio was 9.84%. KeyBank was reported as “well capitalized” under prompt corrective action standards.
Material changes versus the prior comparable period
- Continuing-operations income attributable to common shareholders rose 47%, while diluted continuing-operations EPS rose from $1.12 to $1.70. The lower tax burden, principally following the Tax Cuts and Jobs Act, was a major contributor; 2017 also included a $147 million tax charge related to tax reform.
- GAAP net interest income increased 3.5%. Higher earning-asset balances and yields were partly offset by higher deposit costs and lower purchase-accounting accretion; the net interest margin was unchanged.
- Average loans increased to $88.3 billion from $86.4 billion, with growth in commercial and industrial lending and indirect auto, partly offset by declines in commercial real estate, construction and home equity balances. Average deposits increased to $105.1 billion.
- Credit provision increased to $246 million from $229 million. Net charge-offs rose to $234 million from $208 million, or 0.26% of average loans versus 0.24%. Nonperforming assets increased to $577 million from $534 million; nonperforming loans were $542 million versus $503 million.
- Key Community Bank income attributable to Key increased to $942 million from $658 million. Key Corporate Bank income declined to $789 million from $818 million, reflecting lower net interest income, higher credit provision and higher expenses.
- Key sold its insurance subsidiary KIBS in May 2018 and recorded a total $78 million gain. Assets under management fell 7.1% to $36.8 billion, largely reflecting market depreciation in the second half. Common shares repurchased totaled $1.145 billion; the annual common dividend rose 49% to $0.565 per share.
Fourth-quarter continuing-operations income attributable to common shareholders was $459 million, or $0.45 per share, versus $181 million, or $0.17, in fourth-quarter 2017. The prior-year quarter included a substantial tax-reform-related charge.
Guidance, management commentary, risks and unusual items
- For 2019, management expected taxable-equivalent net interest income of $4.0–$4.1 billion, assuming no additional interest-rate increases; average loans of $90–$91 billion; and average deposits of $108–$109 billion.
- 2019 outlook also included noninterest income of $2.5–$2.6 billion, noninterest expense of $3.85–$3.95 billion, and a GAAP tax rate of 18%–19%. Management expected credit provision to slightly exceed net charge-offs to support loan growth.
- Management targeted $200 million of cost savings in 2019 and expected to reach its 54%–56% cash efficiency ratio target in the second half of 2019. Its longer-term target for return on average tangible common equity was 16%–19%; the targeted net charge-off range through a credit cycle was 0.40%–0.60%.
- Key identified concentration and cyclical risks: commercial and industrial, commercial real estate and commercial lease exposures were about 74% of loans; commercial real estate conditions, including multifamily supply and property values, could weaken. Other prominent risks include borrower defaults, interest-rate and funding changes, cybersecurity and third-party outages, regulation, litigation, LIBOR transition, and execution of strategic initiatives.
- Key expected the 2020 adoption of the current expected credit loss standard (CECL) to generally increase credit-loss allowances, but said the quantitative impact could not yet be reasonably estimated. The filing also describes the 2018 tax reform benefit and the $78 million KIBS sale gain as notable items.
- Legal proceedings were not expected by management to have a material adverse effect on consolidated financial condition based on information then available, although the filing cautions that outcomes may exceed reserves and affect a particular period. Ernst & Young issued an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- How much of the 2018 earnings increase reflects recurring operating improvement versus tax reform and other one-time or nonrecurring items.
- Whether loan growth, deposit pricing and funding costs support the 2019 net interest income outlook, especially under the stated no-rate-increase assumption.
- Trends in commercial credit quality, nonperforming assets and charge-offs, including the commercial real estate and C&I concentrations.
- Progress toward the $200 million cost-savings goal and the 54%–56% efficiency target, without impairing revenue growth or service.
- The eventual CECL allowance and capital impact, and any subsequent changes to regulatory requirements, liquidity, litigation or the LIBOR transition.