KEYCORP annual report, FY2013

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KeyCorp 2013 Form 10-K Summary

Business context and reporting period. KeyCorp is an Ohio bank holding company headquartered in Cleveland, with $92.9 billion in assets at December 31, 2013. Its principal subsidiary, KeyBank, provides banking and financial services through Key Community Bank and Key Corporate Bank. The filing covers the fiscal year ended December 31, 2013, and compares results primarily with 2012. KeyBank operated 1,028 branches in 12 states.

Financial performance and condition

  • Earnings: Net income attributable to Key was $910 million, up from $858 million in 2012. Net income attributable to common shareholders was $887 million, or $0.98 per share ($0.97 diluted). From continuing operations, income attributable to common shareholders was $847 million, or $0.93 per share.
  • Revenue and margins: GAAP net interest income was $2.325 billion, up 2.7%; noninterest income was $1.766 billion, down 4.8%. Taxable-equivalent net interest margin fell to 3.12% from 3.21%. Noninterest income declines included operating lease gains and consumer mortgage income; growth in cards and payments, mortgage servicing, and trust services partly offset them.
  • Expenses and credit costs: Noninterest expense was $2.820 billion, essentially flat year over year. Provision for loan and lease losses fell to $130 million from $229 million. Net charge-offs declined to $168 million, or 0.32% of average loans, from $345 million, or 0.69%.
  • Asset quality: Nonperforming loans declined to $508 million, or 0.93% of period-end loans, from $674 million, or 1.28%. Nonperforming assets fell to $531 million from $735 million. The allowance for loan and lease losses was $848 million, 1.56% of loans and 166.9% of nonperforming loans, compared with $888 million, 1.68% and 131.8%, respectively, in 2012.
  • Balance sheet and funding: Total assets were $92.934 billion, loans $54.457 billion, deposits $69.262 billion, and long-term debt $7.650 billion at year-end. Versus 2012, loans rose 3.1%, deposits rose 5.0%, and long-term debt rose 11.7%. The loan-to-deposit ratio improved to 83.8% from 85.8%.
  • Capital: KeyCorp reported Tier 1 risk-based capital of 11.96%, total risk-based capital of 14.33%, leverage of 11.11%, and Tier 1 common equity of 11.22%. The Tier 1 common ratio was 11.36% in 2012. Key estimated a 10.7% Common Equity Tier 1 ratio under Basel III at year-end and said capital exceeded applicable minimum requirements.
  • Cash flow and liquidity: Cash from operating activities was $1.579 billion; investing activities used $4.224 billion; financing activities provided $2.678 billion. Cash and due from banks increased $33 million to $617 million. The reported liquid-asset portfolio was $11.6 billion; Key also cited $15.5 billion in unused secured borrowing capacity at the Federal Reserve Bank of Cleveland and $2.5 billion at the Federal Home Loan Bank of Cincinnati.
  • Shareholder returns: Key repurchased $474 million of common shares during 2013 and paid $0.215 per common share in dividends, compared with $0.18 in 2012. The quarterly dividend was increased to $0.055 in 2013. Management reported returning approximately 76% of 2013 net income to shareholders through dividends and repurchases.

Material changes versus 2012

  • Continuing-operations income attributable to Key common shareholders increased to $847 million from $813 million; diluted continuing-operations EPS rose to $0.93 from $0.86.
  • Loan growth was led by commercial, financial and agricultural loans, up 7.4% at year-end. Average total loans rose 5.3%; non-time deposits also increased, improving the funding mix and reducing deposit costs.
  • Credit quality improved substantially, with lower charge-offs, nonperforming loans and provisions. The allowance declined as credit indicators improved.
  • Net interest margin narrowed despite higher net interest income, as lower asset yields and increased liquidity weighed on returns. Noninterest income fell, chiefly reflecting lower leasing gains and mortgage origination income.
  • Key recorded $241 million in annualized run-rate savings from its efficiency initiative, exceeding its stated $200 million target. It consolidated 62 branches during 2013.
  • Long-term debt increased while capital ratios eased modestly. Available-for-sale securities had $283 million of gross unrealized losses at year-end, versus none reported in 2012; management characterized the losses as temporary and reported no securities impairment losses recognized in earnings in 2013.

Outlook, commentary, risks and unusual items

  • Management outlook: Key expected average total loans to grow in the mid-single-digit range in 2014, led by commercial lending. It expected net interest margin to remain under pressure from low rates and elevated liquidity. Management expected net charge-offs to remain at the lower end of, or below, its long-term target of 0.40%–0.60%. The filing does not provide formal 2014 earnings or revenue guidance.
  • Efficiency and strategy: Priorities included growing client relationships, controlling expenses, maintaining capital and liquidity, and improving operating efficiency. The long-term cash efficiency ratio target was 60%–65%; the 2013 reported ratio was 67.5%, or 64.6% excluding efficiency initiative and pension settlement charges.
  • Unusual items and discontinued operations: The July 2013 sale of Victory generated a $92 million after-tax gain, of which $72 million was cash. Discontinued operations produced $40 million of net income in 2013; this included the Victory gain and a loss from the discontinued education lending business. A further Victory sale gain was possible depending on client consents, but was not accrued at year-end. The education loan securitization trusts recorded a $48 million after-tax fair-value loss in the third quarter following revised default and recovery assumptions.
  • Regulatory and capital-planning matters: Key filed its 2014 capital plan under the Federal Reserve’s CCAR process; results were expected in March 2014. Future dividends and repurchases remained subject to regulatory review. The filing discussed proposed U.S. liquidity requirements and stated Key was working toward compliance; the proposed treatment of government-sponsored-enterprise securities and municipal deposits could affect liquidity management. Basel III capital rules were scheduled to phase in, with full implementation generally planned for 2019.
  • Principal risks: Credit exposure includes commercial real estate, construction lending and other larger commercial loans; approximately 70% of the loan portfolio was commercial, real estate or commercial lease related. Other material risks include interest-rate and margin pressure, economic and regional weakness, new regulation, funding and rating changes, litigation, cybersecurity and third-party operational disruptions, competition, and the accuracy of valuation and credit models.
  • Contingencies: Key disclosed various legal matters, including Austin Madoff-related ERISA claims with a settlement agreement in principle, an appeal in the Metyk ERISA matter, and an appeal in the overdraft litigation. Management said established reserves were adequate and did not expect legal proceedings to have a material adverse effect on consolidated financial condition, while cautioning that outcomes could exceed reserves and affect results in a particular period.
  • Controls and audit: Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2013. The auditor issued an unqualified opinion on the consolidated financial statements.

Most important facts for investors to verify

  • Whether 2014 loan growth, credit quality and charge-off trends matched management’s expectations, and whether loan growth generated adequate risk-adjusted returns.
  • How net interest margin and deposit pricing evolved as rates and liquidity levels changed.
  • Whether the reported efficiency savings were sustained and translated into improved operating leverage, given the 2013 cash efficiency ratio remained above the long-term target.
  • The adequacy of the allowance for loan and lease losses relative to portfolio growth, commercial real estate exposures, and future economic conditions.
  • Capital-plan and dividend or repurchase approvals, and the effect of Basel III and liquidity rules on capital deployment and funding costs.
  • The final Victory-related proceeds or contingent gain, performance of the acquired mortgage servicing portfolio, and the outlook for the discontinued education loan portfolio.
  • Developments in the identified legal proceedings, cybersecurity risks, and other contingencies, including any effects on reserves, earnings or liquidity.