KeyCorp 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. KeyCorp is a Cleveland-based bank holding company operating through KeyBank, principally in Key Community Bank and Key Corporate Bank. The 2017 comparison with 2016 is affected by the First Niagara acquisition: its results were included for a full year in 2017 but only from August 1, 2016, in 2016.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets at year-end | $137.7 billion | $136.5 billion |
| Loans at year-end | $86.4 billion | $86.0 billion |
| Deposits at year-end | $105.2 billion | $104.1 billion |
| Net interest income (GAAP) | $3.777 billion | $2.919 billion |
| Net interest margin (taxable-equivalent) | 3.17% | 2.92% |
| Noninterest income | $2.478 billion | $2.071 billion |
| Noninterest expense | $4.098 billion | $3.756 billion |
| Net income attributable to Key | $1.296 billion | $791 million |
| Net income attributable to common shareholders | $1.226 billion; diluted EPS $1.13 | $754 million; diluted EPS $0.80 |
Revenue on a taxable-equivalent basis was $6.308 billion, up 25.6%. Management cited the full-year First Niagara contribution, higher rates, low deposit betas, and core earning-asset growth. Investment banking and debt placement fees rose to $603 million. Reported earnings also reflect tax reform and other unusual items described below.
Credit and margins: Provision for credit losses was $229 million, down from $266 million. Net loan charge-offs were $208 million, or 0.24% of average loans, versus $205 million and 0.29% in 2016. Nonperforming assets fell to $534 million from $676 million; nonperforming loans were 0.58% of period-end loans. The allowance for loan and lease losses was $877 million, or 1.01% of loans.
Cash flow: Operating activities provided $1.815 billion; investing activities used $2.239 billion; and financing activities provided $418 million. Cash and due from banks ended the year at $671 million. These cash-flow figures should be read alongside the bank’s liquidity assets and funding disclosures, not as a standalone measure of liquidity.
Debt, liquidity, and capital: Long-term debt was $14.333 billion, up from $12.384 billion; total deposits were $105.235 billion. The loan-to-deposit ratio was 84.4%. The liquid asset portfolio was $27.2 billion, and unused secured borrowing capacity was reported at $23.8 billion at the Federal Reserve Bank of Cleveland and $6.3 billion at the FHLB. KeyCorp’s Modified LCR was above the 100% requirement. Year-end regulatory ratios included CET1 of 10.16%, Tier 1 capital of 11.01%, total risk-based capital of 12.92%, and leverage of 9.73%. KeyBank was reported well-capitalized.
Common dividends paid were $0.38 per share for 2017. KeyCorp repurchased $730 million of common shares during the year, including employee-plan repurchases. The board-authorized 2017 capital plan permitted up to $800 million of repurchases through the second quarter of 2018.
Material changes versus 2016
- Net income attributable to Key increased to $1.296 billion from $791 million, while net interest margin improved to 3.17% from 2.92%. First Niagara’s full-year contribution is a major comparability factor.
- Noninterest income rose 19.7%; investment banking and debt placement fees increased 25.1%, and cards and payments income increased 23.2%. The merchant-services acquisition generated a $59 million gain.
- Noninterest expense increased 9.1%, including $217 million of merger-related charges in 2017; the company said First Niagara merger charges ended in the fourth quarter.
- The effective tax rate rose to 33.0% from 18.5%. The Tax Cuts and Jobs Act produced an estimated $161 million reduction in 2017 net income, including a $147 million increase in income tax provision and a $14 million reduction in certain low-income-housing investments. The estimate remained subject to refinement.
- Long-term debt increased by about $1.9 billion. Common Equity Tier 1 rose to 10.16% from 9.54% under the reported regulatory capital rules; the company’s fully phased-in estimate was 10.05%.
Outlook, management commentary, risks, and unusual items
For 2018, management expected net interest income of $3.9–$4.0 billion, assuming one additional rate increase in June; noninterest income of $2.5–$2.6 billion; and noninterest expense of $3.85–$3.95 billion. It forecast average loans of $88.5–$89.5 billion and average deposits of $104.5–$105.5 billion. Provision was expected to slightly exceed net charge-offs to support loan growth, while net charge-offs were expected to remain below the long-term target range.
Beginning in 2018, long-term targets were positive operating leverage, a cash efficiency ratio of 54%–56%, net charge-offs of 0.40%–0.60% of average loans, and return on tangible common equity of 15%–18%. For 2017, reported cash efficiency was 63.5%, or 60.2% excluding notable items; return on average tangible common equity was 10.84%, or 13.14% excluding notable items. These are non-GAAP measures.
Key risks include its commercial lending concentration (about 73% of loans were C&I, commercial real estate, or commercial leases), possible deterioration in commercial real estate and borrower credit, interest-rate and funding sensitivity, regulatory and capital constraints, cybersecurity and third-party operational risks, litigation, and execution of integration and other strategic initiatives. Management warned that First Niagara synergies and cost savings may not be fully realized. Legal proceedings may exceed reserves, though management did not expect known matters to materially affect consolidated financial condition. The overdraft class action was dismissed after an appellate ruling requiring arbitration.
Other items include the $59 million merchant-services gain, $217 million merger charges, tax-reform-related impacts, and $31 million impairment on certain tax-credit investments associated with tax reform. The company reported no goodwill impairment in its 2017 annual test. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- How much of 2017’s earnings and revenue growth reflects underlying organic performance versus First Niagara’s full-year contribution, purchase-accounting accretion, acquisitions, and one-time items.
- The final tax-reform impact: the $161 million net-income reduction was an estimate, with finalization expected by September 30, 2018.
- Whether cost savings, revenue synergies, and the 2018 efficiency and return targets are achieved, and how reported results compare with management’s non-GAAP adjustments.
- Credit trends in C&I and commercial real estate, including criticized loans, nonperforming assets, charge-offs, allowance adequacy, and the geographic/property concentration of the portfolio.
- Capital distributions and liquidity capacity, including the effect of regulation, KeyBank dividend capacity, funding costs, and the maturity schedule for long-term debt.
- The assumptions and sensitivity behind management’s interest-rate outlook, particularly deposit betas, rate changes, and net interest income projections.