KeyCorp 2019 Form 10-K Summary
Business context and reporting period
KeyCorp is a U.S. bank holding company headquartered in Cleveland, Ohio, operating primarily through KeyBank. It provides consumer and commercial banking, lending, capital markets, wealth management, and related services across 15 states. This annual report covers the fiscal year ended December 31, 2019; prior-year comparisons are to 2018 unless noted. Key reorganized its reportable segments as Consumer Bank and Commercial Bank in 2019, and restated prior-period segment data.
Financial results and key metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income (GAAP) | $3.909 billion | $3.909 billion |
| Net interest margin (taxable-equivalent) | 3.04% | 3.17% |
| Noninterest income | $2.459 billion | $2.515 billion |
| Noninterest expense | $3.901 billion | $3.975 billion |
| Provision for credit losses | $445 million | $246 million |
| Income from continuing operations attributable to Key common shareholders | $1.611 billion; diluted EPS $1.61 | $1.793 billion; diluted EPS $1.70 |
| Net income attributable to Key | $1.717 billion | $1.866 billion |
| Operating cash flow | $2.906 billion | $2.506 billion |
- Full-year revenue on a taxable-equivalent basis was $6.400 billion, down from $6.455 billion. Expenses fell 1.9%; management reported a 59.6% cash efficiency ratio, improved from 60.0%.
- Average loans rose 3.6% to $91.5 billion and average deposits increased 4.7% to $110.0 billion. At year-end, loans were $94.6 billion, deposits $111.9 billion, and total assets $145.0 billion.
- Net loan charge-offs were $424 million, or 0.46% of average loans, versus $234 million, or 0.26%, in 2018. The allowance for loan and lease losses was $900 million (0.95% of period-end loans), compared with $883 million (0.99%) a year earlier. Nonperforming assets increased to $715 million from $577 million.
- Year-end long-term debt was $12.448 billion, down from $13.732 billion. Shareholders’ equity was $17.038 billion. Common Equity Tier 1 was 9.44%; total risk-based capital was 12.79%.
- Cash and due from banks ended at $732 million, up $54 million. Investing activities used $4.918 billion and financing activities provided $2.066 billion. The filing’s cash-flow statement reports these totals; cash flows are affected substantially by bank balance-sheet activity.
- Key reported a $25.2 billion liquid asset portfolio and $25.2 billion of unused secured borrowing capacity at the Federal Reserve Bank of Cleveland, plus $8.0 billion at the FHLB of Cincinnati. KeyCorp held $3.8 billion in cash and short-term investments; KeyBank paid $1.2 billion in dividends to the parent during 2019.
Material changes and unusual items
- A previously disclosed customer fraud resulted in $139 million of 2019 net loan charge-offs and was a principal driver of the higher provision. Management said the loss reduced 2019 return on average tangible common equity by $106 million after tax.
- Key acquired Laurel Road’s digital lending business in April 2019; it originated $1.8 billion in consumer direct loans during the year. Consumer loans grew 14.5% year over year, partly reflecting Laurel Road, residential mortgage, and indirect auto growth.
- Commercial real estate loans declined $902 million, while commercial and industrial loans increased $2.5 billion. The company sold $12.2 billion of loans during 2019.
- Key repurchased $868 million of common shares, raised the annual common dividend to $0.71 per share from $0.565, and redeemed $300 million of 6.75% senior notes.
- Fourth-quarter continuing-operations income attributable to common shareholders was $439 million, or $0.45 diluted EPS, versus $459 million, or $0.45, in Q4 2018. Q4 provision was $109 million versus $59 million; net charge-offs were $99 million, or 0.42% of average loans.
- Q4 2019 noninterest expense included $22 million of notable items: an $18 million pension settlement charge and $4 million of professional fees related to the fraud. Q4 2018 had $41 million of notable items.
Outlook, management commentary, and risks
- For 2020, management expected taxable-equivalent net interest income to increase 1%–3% from 2019, with net interest margin relatively stable versus Q4 2019; average loans to grow 4%–6% and deposits 1%–3%.
- Management expected noninterest income to rise 4%–6%, noninterest expense to be relatively stable, and the GAAP tax rate to be 17%–18%. With a relatively stable economic outlook, it expected provision expense to slightly exceed net charge-offs to support loan growth.
- Management’s long-term targets include a 54%–56% cash efficiency ratio, return on average tangible common equity of 16%–19%, and net charge-offs to average loans of 0.40%–0.60% through a credit cycle. The 2019 actual efficiency ratio and tangible-equity return were 59.6% and 13.46%, respectively; the fraud loss affected credit and return measures.
- Key adopted the CECL credit-loss standard on January 1, 2020 and estimated an initial allowance increase of approximately 20%–25%, with the largest proportional increase expected in longer-duration consumer loans and lines of credit. It elected to phase in the regulatory capital impact over 2020–2023.
- Key identified concentrated commercial and industrial, commercial real estate, and commercial lease exposure; about 72% of loans were in these categories. Other principal risks include economic and regional deterioration, interest-rate and funding changes, cyber and third-party operational events, regulatory and compliance costs, litigation, and the LIBOR transition. The 2019 filing says LIBOR was expected to cease after 2021 and describes an enterprise transition program.
- The company disclosed $66.2 billion of lending-related and other off-balance-sheet commitments. It said established legal reserves were believed adequate and that pending proceedings were not expected to materially affect financial condition, while noting outcomes could still materially affect a particular period.
- CEO Beth Mooney was expected to retire effective May 1, 2020, with President and COO Christopher Gorman designated to succeed her. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls were effective.
Investor facts to verify
- Whether the fraud-related loss is fully contained and whether subsequent credit losses, criticized loans, and nonperforming assets stabilize.
- The final CECL transition allowance and capital effects, and the pace of any resulting provision expense.
- Execution against 2020 net interest income, loan and deposit growth, fee-income, expense, and tax-rate expectations.
- Capital and liquidity capacity after dividends, share repurchases, debt maturities, and regulatory changes; also confirm the parent’s reliance on subsidiary dividends.
- Commercial real estate and C&I concentrations, including borrower, sector, property-type, and geographic exposures.
- Progress on LIBOR-to-alternative-rate contract and systems conversion, and any material legal, regulatory, cyber, or contingent-liability developments.