KeyCorp 10-Q Summary — First Quarter 2015
Reporting period: Three months ended March 31, 2015. KeyCorp is a bank holding company operating through KeyBank, with Key Community Bank and Key Corporate Bank as its major segments. Dollar amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Taxable-equivalent revenue | $1,014 | $1,004 |
| Net interest income, GAAP | $571 | $563 |
| Net interest income, taxable-equivalent | $577 | $569 |
| Net interest margin | 2.91% | 3.00% |
| Provision for credit losses | $35 | $4 |
| Noninterest income | $437 | $435 |
| Noninterest expense | $669 | $664 |
| Income from continuing operations | $230 | $238 |
| Net income attributable to Key | $233 | $242 |
| Net income attributable to common shareholders | $227 | $236 |
| Diluted EPS attributable to common shareholders | $0.26 | $0.26 |
- Revenue increased 1.0% on a taxable-equivalent basis, but continuing-operations income attributable to Key common shareholders fell $10 million. Higher credit-loss provision and lower net interest margin outweighed modest revenue growth.
- Return on average assets from continuing operations was 1.03%; return on average common equity was 8.76%; cash efficiency ratio was 65.1% (non-GAAP).
- Average loans were $57.5 billion, up $2.8 billion year over year, led by commercial lending. Average domestic deposits were $68.8 billion, up $3.2 billion.
- At March 31, total assets were $94.2 billion, net loans $57.2 billion, deposits $71.6 billion, long-term debt $8.7 billion, and shareholders’ equity $10.6 billion. Loans held for sale rose to $1.65 billion from $734 million at year-end 2014.
- Cash and due from banks ended the quarter at $506 million. Operating cash flow was negative $1.102 billion, investing cash flow was positive $582 million, and financing cash flow was positive $373 million; cash decreased $147 million during the quarter.
Credit quality, capital and liquidity
- The allowance for loan and lease losses was $794 million, or 1.37% of loans, versus $834 million, or 1.50%, a year earlier. Net charge-offs were $28 million, or 0.20% of average loans, compared with $20 million, or 0.15%.
- Nonperforming loans were $437 million, up from $418 million at year-end but down from $449 million a year earlier. Nonperforming assets were $457 million, versus $469 million a year earlier. Accruing loans 90 days or more past due increased to $111 million from $89 million year over year.
- Reported capital ratios were 10.64% Common Equity Tier 1, 11.04% Tier 1 risk-based capital, 12.79% total risk-based capital, and 10.91% leverage. These remained above stated regulatory minimums, although Tier 1 and total risk-based ratios were lower than a year earlier.
- The liquid asset portfolio was $13.5 billion, with additional unused secured borrowing capacity of $19.3 billion at the Federal Reserve Bank of Cleveland and $2.8 billion at the FHLB. Estimated Modified LCR was in the high-80% range; the minimum is scheduled to begin at 90% in 2016 and rise to 100% in 2017.
- KeyBank issued $1 billion of 2.25% senior bank notes due 2020 in February. KeyBank paid KeyCorp $250 million in dividends during the quarter; reported dividend capacity at quarter-end was $919 million.
Material changes and management outlook
- Commercial, financial and agricultural loans increased 9.8% year over year; average commercial loans grew broadly. The company attributed higher net interest income to loan growth, partly offset by lower earning-asset yields; margin declined from 3.00% to 2.91%.
- Noninterest income was nearly flat. Trust and investment services income rose $11 million, partly reflecting the 2014 Pacific Crest Securities acquisition; investment banking and debt placement fees fell $16 million, and leasing income and gains fell $10 million, partly due to a prior-year leveraged-lease termination gain.
- Noninterest expense rose $5 million year over year, with acquisition-related and employee-benefit costs partly offset by lower professional fees and ongoing savings. First-quarter expenses included $7 million of continuous-improvement costs.
- For full-year 2015, management expected net interest income growth in the low- to mid-single-digit range versus 2014, with net interest margin stable to slightly higher later in the year; mid-single-digit noninterest-income growth; and noninterest expense relatively stable. It anticipated average loan growth in the mid-single-digit range.
- Management expected provision expense to approximate net charge-offs for the rest of 2015 and charge-offs to remain below its 0.40%–0.60% target range. The filing noted that Q1 GDP growth was weak and consumer spending, wage growth and housing indicators remained subdued.
- The Federal Reserve did not object to KeyCorp’s 2015 capital plan. It authorized up to $725 million of share repurchases from Q2 2015 through Q2 2016. A proposed quarterly common dividend increase from $0.065 to $0.075 was subject to Board review; a further increase up to $0.085 could be considered in 2016.
Risks, contingencies and unusual items
- Key identified credit and commercial real estate deterioration, borrower defaults, concentrated commercial lending, economic and regional weakness, interest-rate changes, funding access and ratings downgrades among key risks. Operational, compliance, cybersecurity, litigation, regulatory and model risks were also highlighted.
- Moody’s placed KeyBank’s deposit ratings on review for possible upgrade and certain senior ratings on review for possible downgrade following a change in rating methodology; the filing said this was not associated with a change in Key’s underlying risk.
- Guarantees had maximum potential undiscounted payments of $15.1 billion and recorded liabilities of $200 million, primarily standby letters of credit and written put options. Management assessed the payment/performance risk for these guarantees as low.
- Key disclosed ongoing litigation, including overdraft-related proceedings, and cautioned that outcomes could exceed reserves or materially affect a particular period, while stating no other known matter was expected to materially adversely affect financial condition.
- The education lending business remained in discontinued operations. The quarter recorded $5 million of after-tax discontinued-operations income; discontinued assets totaled $2.25 billion, principally education loans. Key sold residual interests in its education-loan securitization trusts in 2014 and deconsolidated those trusts.
- The filing reported no material effect from accounting guidance adopted in Q1 2015. Management stated that the interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether loan growth, especially commercial and commercial real estate growth, continues without weakening credit quality; monitor nonperforming loans, past-due balances, charge-offs and allowance coverage.
- Whether management achieves its 2015 net interest income, margin, revenue, expense and loan-growth outlook amid low rates and subdued economic conditions.
- Whether the Modified LCR reaches the 90% minimum by January 2016 and how compliance affects the securities portfolio, funding costs and product offerings.
- Capital ratios after planned repurchases and any dividend increase, including the phase-out of trust preferred securities from Tier 1 capital.
- The scale and performance of loans held for sale, particularly the sharp increase in commercial mortgage loans, and associated sales activity and gains.
- Developments in Moody’s ratings review, legal proceedings, contingent guarantees and cybersecurity or operational exposures.