KeyCorp — Q1 2019 Form 10-Q
Business context and reporting period. Quarter ended March 31, 2019; comparisons are with Q1 2018 unless otherwise stated. KeyCorp is a bank holding company operating through Consumer Bank and Commercial Bank. The company realigned its reporting segments in Q1 and restated prior-period segment data. Financial statements are unaudited; Ernst & Young performed an interim review, not an audit.
Financial results and condition
| Metric | Q1 2019 | Comparable period / change |
|---|---|---|
| Net interest income (GAAP) | $977 million | $944 million, up 3.5% |
| Net interest income (taxable-equivalent) | $985 million | $952 million, up 3.5% |
| Net interest margin (taxable-equivalent, continuing operations) | 3.13% | 3.15%, down 2 basis points |
| Noninterest income | $536 million | $601 million, down 10.8% |
| Noninterest expense | $963 million | $1.006 billion, down 4.3% |
| Income from continuing operations before tax | $488 million | $478 million |
| Net income attributable to Key | $407 million | $418 million |
| Net income attributable to common shareholders / diluted EPS | $387 million / $0.38 | $404 million / $0.38 |
| Operating cash flow | $556 million | $(211) million |
| Period-end loans / deposits | $90.2 billion / $108.2 billion | Loans up $626 million and deposits up $866 million from year-end 2018 |
| Long-term debt | $14.2 billion | $13.7 billion at year-end 2018 |
| Common Equity Tier 1 ratio | 9.81% | 9.93% at year-end 2018 |
Cash flows also included $1.534 billion net cash used in investing activities and $911 million provided by financing activities. Total assets were $141.5 billion. The loan-to-deposit ratio was 85.1%; liquid assets totaled $25.4 billion, with an additional $33.5 billion of unused secured borrowing capacity at the Federal Reserve Bank of Cleveland and FHLB.
Credit indicators remained comparatively low: net charge-offs were $64 million, or 0.29% of average loans, versus $54 million, or 0.25%, a year earlier. Nonperforming assets were $597 million, up from $569 million year over year; the allowance for loan and lease losses was $883 million, or 0.98% of period-end loans.
Material changes and notable items
- Revenue on a taxable-equivalent basis declined 2.1% year over year. Higher interest income and loan growth were offset by increased deposit and debt funding costs, lower purchase-accounting accretion and loan fees, and weaker noninterest income.
- Noninterest income fell mainly because investment banking and debt placement fees declined 23.1%, trust and investment services income fell following the 2018 sale of KIBS, and other income was lower. Noninterest expense decreased 4.3%, reflecting lower personnel costs and FDIC assessments, partly offset by higher other expenses.
- Q1 2019 tax expense was $82 million versus $62 million in Q1 2018. Effective tax rates were 17.0% and 12.9%, respectively; discrete tax benefits were $5 million and $26 million.
- Consumer Bank net income increased to $164 million from $131 million; Commercial Bank net income decreased to $253 million from $276 million.
- Adoption of the lease standard on January 1, 2019 increased operating lease right-of-use assets and liabilities by about $710 million. At March 31, operating lease assets were $694 million and liabilities were $787 million.
- Key repurchased $199 million of common shares in Q1 and paid a $0.17 per-share dividend. Laurel Road’s digital lending business was acquired on April 3, 2019, after quarter-end; its results are expected to be consolidated beginning in Q2.
Outlook, commentary and risks
- Management expected 2019 taxable-equivalent net interest income of $4.0–$4.1 billion, assuming no further rate increases; average loans of $90–$91 billion; and average deposits of $108–$109 billion.
- 2019 outlook ranges were $2.5–$2.6 billion for noninterest income and $3.85–$3.95 billion for noninterest expense. Management expected provision expense to slightly exceed net charge-offs to support loan growth.
- Management targeted a 54%–56% cash efficiency ratio and expected to reach that range in the second half of 2019. The Q1 ratio was 61.9%, 100 basis points better than a year earlier but higher than Q4 2018’s 59.9%.
- The company’s announced 2019 capital plan authorized up to $1.0 billion of share repurchases from Q3 2019 through Q2 2020. The Board planned to consider a quarterly dividend increase, potentially up to $0.185 per share, in Q3.
- Management said credit quality trends remained benign, while noting higher commercial lease financing charge-offs. Key’s largest loan concentration was commercial and industrial lending; commercial real estate market deterioration, borrower defaults, economic weakness, interest-rate and funding changes, cybersecurity, regulation, and litigation were among the disclosed risks.
- Key expected the new expected-credit-loss standard, scheduled for adoption in 2020, to increase the allowance, particularly for long-term consumer loans; the amount could not yet be reasonably estimated. Legal matters were not expected to have a material adverse effect based on information available, but outcomes could exceed reserves and affect results in a particular period.
Important facts for investors to verify
- Whether revenue and fee trends stabilize, and whether expense reductions deliver the targeted cash efficiency ratio without impairing growth.
- Whether funding costs and deposit mix pressure net interest margin, given higher interest expense and management’s rate assumptions.
- Trends in commercial lease charge-offs, nonperforming assets, commercial real estate exposure, and the allowance for credit losses.
- The eventual CECL allowance impact and Laurel Road’s integration, purchase accounting, and contribution to results after closing.
- Execution of the capital plan, including repurchases, any dividend increase, and capital ratios after distributions.