KeyCorp 2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2012; fourth-quarter results are also summarized. KeyCorp is an Ohio bank holding company headquartered in Cleveland, with $89.2 billion in consolidated assets. Through KeyBank, it provides consumer and commercial banking, lending, investment management, equipment finance, and investment banking services. Its principal segments are Key Community Bank and Key Corporate Bank.
Financial performance and condition
| Metric | 2012 | Prior comparable period |
|---|---|---|
| Net interest income (GAAP) | $2.264 billion | $2.267 billion in 2011 |
| Noninterest income | $1.967 billion | $1.808 billion in 2011 |
| Noninterest expense | $2.907 billion | $2.790 billion in 2011 |
| Provision for loan and lease losses | $229 million | $60 million credit in 2011 |
| Income from continuing operations attributable to Key common shareholders | $827 million; $0.88 per share | $857 million; $0.92 per share |
| Net income attributable to Key common shareholders, including discontinued operations | $836 million; $0.89 per share | $813 million; $0.87 per share |
| Net interest margin, taxable-equivalent | 3.21% | 3.16% in 2011 |
| Cash provided by operating activities | $1.355 billion | $1.890 billion in 2011 |
Annual pre-tax income from continuing operations was $1.095 billion; the effective tax rate was 21.8%, versus 27.4% in 2011. Return on average assets from continuing operations was 1.05%, compared with 1.17%. The filing reports taxable-equivalent revenue of $4.255 billion and pre-provision net revenue of $1.348 billion; these are non-GAAP measures.
At year-end, total assets were $89.236 billion, loans were $52.822 billion, deposits were $65.993 billion, long-term debt was $6.847 billion, and shareholders’ equity was $10.309 billion. The loan-to-deposit ratio was 85.77%. Tier 1 common equity was 11.36%, total risk-based capital was 15.13%, and the leverage ratio was 11.41%; KeyBank met the regulatory definition of well capitalized. Key reported $8.6 billion in liquid assets and $2.2 billion of parent-company short-term investments.
Asset quality improved year over year: net charge-offs fell to $345 million, or 0.69% of average loans, from $541 million, or 1.11%; nonperforming loans declined to $674 million from $727 million; and nonperforming assets declined to $735 million from $859 million. The allowance for loan and lease losses was $888 million, or 1.68% of period-end loans, versus $1.004 billion, or 2.03%, in 2011.
In the fourth quarter, continuing-operations income attributable to common shareholders was $193 million, or $0.21 per share, compared with $201 million, or $0.21, a year earlier. Taxable-equivalent net interest income was $607 million and net interest margin was 3.37%. Net charge-offs were $58 million, or 0.44% of average loans.
Material changes versus 2011
- Common-shareholder income from continuing operations decreased 3.5%, while total net income attributable to common shareholders increased from $813 million to $836 million, reflecting the contribution from discontinued operations.
- Net interest income was nearly flat as lower funding costs offset lower interest income on earning assets. Average loans grew 3.6%; commercial, financial, and agricultural loans grew 20.8% on average. The year-end loan portfolio rose to $52.8 billion from $49.6 billion.
- Noninterest income rose 8.8%, led by loan-sale gains and gains on leased equipment. Noninterest expense increased 4.2%, with personnel costs up 6.4%; acquisitions and efficiency-program costs contributed to the increase.
- The provision shifted from a $60 million credit to a $229 million expense. This reflected portfolio growth and credit-related factors, despite improved charge-offs and nonperforming assets.
- Long-term debt declined by $2.7 billion. Deposits increased by $4.0 billion, including growth in lower-cost transaction accounts.
- The allowance ratio declined as credit quality improved. The reported 2012 charge-offs included $33 million associated with updated regulatory treatment of certain Chapter 7 bankruptcy loans.
Outlook, commentary, risks, and unusual items
- Management outlook: Key expected average total loans to grow in the mid- to upper-single-digit range in 2013, led by commercial and industrial lending. Management expected first-quarter 2013 net interest margin of about 3.30%, followed by quarterly pressure of 1–3 basis points thereafter, assuming continued low rates. It expected 2013 net charge-offs and provision expense to remain within its long-term 0.40%–0.60% target range.
- Efficiency and footprint: Key targeted $150–$200 million in annual expense run-rate reductions by December 2013 and a 60%–65% cash efficiency ratio by first-quarter 2014. Approximately $60 million of annualized savings had been achieved in 2012. Key planned 40–50 branch closures in 2013.
- Capital and dividends: Key returned approximately 50% of 2012 net income to shareholders through dividends and buybacks. KeyBank had fully used its regulatory capacity to pay dividends to KeyCorp as of January 1, 2013, making parent liquidity and future capital distributions dependent on other sources and regulatory review. The Federal Reserve’s 2013 capital plan review was pending at the filing date.
- Unusual items: Early termination of leveraged leases produced $90 million of noninterest income gains, partly offset by $29 million of net interest income write-offs. Key also recorded a $54 million gain on redemption of trust preferred securities. These items contributed to reported results and may not recur.
- Subsequent event: On February 21, 2013, Key announced an agreement to sell Victory Capital Management and its broker-dealer affiliate for $246 million in cash and debt, subject to adjustment and closing conditions. The sale was expected to close in third-quarter 2013; management estimated an after-tax gain of $145–$155 million.
- Principal risks: Key cited interest-rate sensitivity, slow or weakening economic conditions, commercial real estate and borrower credit quality, funding and liquidity access, regulatory changes including Dodd-Frank and Basel III, litigation, cybersecurity and operational disruptions, and execution of its cost and growth initiatives. Legal matters include unresolved Austin/Madoff-related claims; the filing states outcomes could exceed reserves, although management believed established reserves were adequate overall.
- Other reporting note: The independent auditor gave an unqualified opinion on the financial statements and internal controls; management concluded internal control over financial reporting was effective at year-end.
Investor verification checklist
- Reconcile core earnings with the impact of leveraged-lease terminations, trust-preferred redemption gains, acquisitions, and discontinued operations.
- Assess whether forecast loan growth, margin, credit costs, and efficiency savings were achieved; compare subsequent filings with the 2013 outlook.
- Review the quality and composition of loan growth, commercial real estate exposures, home-equity second liens, and the effect of the Chapter 7 loan classification change.
- Confirm the timing and terms of the Victory sale, including the final seller-note value and realized gain.
- Check subsequent regulatory decisions, including CCAR capital actions, Basel III implementation, and KeyBank’s capacity to resume dividends to KeyCorp.
- Compare reported cash-flow movements and available liquidity facilities with the balance-sheet liquidity measures; the filing gives different unused Federal Home Loan Bank capacity figures in separate discussions, so the applicable measure should be verified.