KeyCorp 2014 Form 10-K Summary
Business context and reporting period. KeyCorp is an Ohio bank holding company headquartered in Cleveland, with KeyBank as its principal subsidiary. It provides retail, commercial, investment banking, leasing, wealth management and related services through Key Community Bank and Key Corporate Bank. At December 31, 2014, Key reported $93.8 billion in assets and operated 994 branches and 1,287 ATMs in 12 states. The filing covers the fiscal year ended December 31, 2014; fourth-quarter comparisons are also summarized below. Unless otherwise indicated, financial amounts are in millions.
Financial performance and condition
| Metric | 2014 | 2013 | Change or context |
|---|---|---|---|
| Net interest income, GAAP | $2,293 | $2,325 | Down $32; taxable-equivalent NII was $2,317, down $31. |
| Net interest margin, taxable-equivalent | 2.97% | 3.12% | Lower earning-asset yields were the primary pressure. |
| Noninterest income | $1,797 | $1,766 | Up $31, or 1.8%. |
| Noninterest expense | $2,759 | $2,820 | Down $61, or 2.2%; included $80 of efficiency- and pension-related charges in 2014. |
| Provision for loan and lease losses | $59 | $130 | Down $71 as credit quality improved. |
| Continuing income attributable to Key common shareholders | $917 | $847 | Up 8.3%; diluted EPS was $1.04 versus $0.93. |
| Net income attributable to Key common shareholders, including discontinued operations | $878 | $887 | Diluted EPS was $0.99 versus $0.97. |
| Return on average assets, continuing operations | 1.08% | 1.03% | Improved 5 basis points. |
| Cash efficiency ratio | 66.1% | 67.5% | Improved, but remained above the long-term target of below 60%. |
- Fourth quarter: Continuing income attributable to common shareholders was $246 million, or diluted EPS of $0.28, compared with $229 million, or $0.26, in Q4 2013. Taxable-equivalent NII was $588 million versus $589 million; NIM was 2.94% versus 3.01%. Noninterest income was $490 million versus $453 million, and noninterest expense was $704 million versus $712 million.
- Balance sheet and funding: Year-end loans were $57.4 billion, up 5.4%; deposits were $72.0 billion, up 4.0%; long-term debt was $7.9 billion, up $225 million. The consolidated loan-to-deposit ratio was 84.6%, compared with 83.8%.
- Capital: Under the capital measures then in effect, Tier 1 risk-based capital was 11.90%, total risk-based capital 13.89%, and leverage 11.26%. Tangible common equity to tangible assets was 9.88%, versus 9.80%. Key estimated its fully phased-in Basel III Common Equity Tier 1 ratio at 10.7%.
- Liquidity: The liquid asset portfolio was $15 billion at year-end. KeyCorp held $2.2 billion in short-term investments. KeyBank paid KeyCorp $300 million in dividends and had stated capacity to pay another $935 million at year-end. Key’s estimated Modified LCR was in the mid-80% range in December 2014; the stated minimums are 90% by January 2016 and 100% by January 2017.
- Cash flows: Consolidated cash flow from operating activities was $1.32 billion, investing activities used $2.82 billion, and financing activities provided $1.53 billion. Cash and due from banks ended the year at $653 million. These cash-flow totals should be read in light of the bank’s deposit, lending and securities activity.
- Credit quality: Net charge-offs were $113 million, or 0.20% of average loans, versus $168 million, or 0.32%. Nonperforming loans fell to $418 million (0.73% of period-end loans) from $508 million (0.93%); nonperforming assets declined 17.9% to $436 million. The allowance for loan and lease losses was $794 million, or 1.38% of loans, and covered nonperforming loans 190%.
- Shareholder returns: The common dividend rose 18% to $0.065 per quarter after Q1, totaling $0.25 per share for 2014. Key repurchased $496 million of common shares during the year under its 2013 and 2014 capital plans.
Material changes versus 2013
- Continuing common earnings and diluted EPS increased, helped by lower credit provisions and lower expenses. Overall common net income was slightly lower because discontinued operations swung to a $39 million loss from $40 million of income.
- Taxable-equivalent NIM declined 15 basis points and NII fell $31 million, as lower asset yields outweighed loan growth and reduced funding costs. Management cited a more favorable mix of lower-cost deposits as a partial offset.
- Commercial, financial and agricultural loans grew 12.1% to $28.0 billion; commercial loans overall rose 8% to $41.4 billion. Commercial loans represented 72.1% of the portfolio, versus 70.4% in 2013.
- Noninterest income growth was led by investment banking and debt placement fees, up $64 million to $397 million. Trust and investment services income also rose; deposit service charges and leasing income declined.
- Key acquired Pacific Crest Securities in September 2014, adding a technology-focused investment banking business and $78 million of goodwill. It also closed 34 branches, reduced fixed-income trading headcount and announced its exit from international leasing.
- The education-loan securitization trusts were deconsolidated after Key sold their residual interests on September 30, 2014. The discontinued education lending business had $2.3 billion of loans remaining at year-end, compared with $4.5 billion a year earlier.
Outlook, risks and unusual items
- Management outlook for 2015: Key expected taxable-equivalent NII growth in the low- to mid-single-digit percentage range versus 2014, with NIM stable to slightly higher later in the year. It expected mid-single-digit noninterest income growth, including Pacific Crest’s full-year contribution; noninterest expense to be relatively stable; and average loan growth in the mid-single digits. Management expected charge-offs to remain below its 0.40%–0.60% long-term target range and provision to approximate net charge-offs. These are forward-looking expectations, not guarantees.
- Capital plan: The Federal Reserve was reviewing Key’s 2015 CCAR capital plan. Management stated that capital actions after Q1 2015 could not proceed until the review was completed without objection; an objection could delay capital actions.
- Interest-rate sensitivity: Management described the balance sheet as moderately asset-sensitive. Its model estimated a 3.20% increase in 12-month NII under a gradual 200-basis-point rise and a 0.96% decline under a 25-basis-point decline scenario. Results depend on rate paths, deposit pricing and customer behavior.
- Regulatory liquidity transition: Key’s estimated Modified LCR in the mid-80% range was below the upcoming 90% minimum. Management said it might alter investment composition or size and product offerings to meet the standard and maintain a cushion.
- Concentration and market risks: About 72% of loans were commercial, financial and agricultural, commercial real estate, or commercial leases. Key highlighted borrower defaults, CRE fundamentals, construction-loan leasing and occupancy, regional economic conditions, low interest rates, oil-price effects, and competition as risks. Oil and gas loans were 2% of total loans; Key said credit quality remained solid and the allowance reflected then-current oil prices.
- Other material risks: The filing identifies heightened regulation and capital requirements, possible restrictions on dividends and repurchases, reliance on subsidiary dividends for parent-company funding, liquidity and rating risks, cybersecurity and third-party service disruptions, litigation, and model risk.
- Unusual items and contingencies: The education-loan trust sale and deconsolidation produced a $25 million after-tax loss in 2014; full-year discontinued operations were a $39 million loss. Key reported $80 million of efficiency- and pension-related charges, compared with $117 million in 2013, and $22 million of Pacific Crest-related expense. The filing states legal reserves were considered adequate and no known matter was expected to materially harm consolidated financial condition, while noting outcomes could exceed reserves. A KeyBank overdraft-practices class action remained in litigation after a February 2015 ruling denying a renewed motion to compel arbitration; KeyBank expected to appeal.
Most important facts for investors to verify
- Whether 2015 NII, NIM, fee-income, expense and loan-growth expectations were achieved, particularly given the sensitivity to rates and deposit pricing.
- Whether Key met the Modified LCR milestones and how compliance affected securities mix, funding costs and customer products.
- Whether the 2015 CCAR plan received Federal Reserve non-objection and what capital distributions were ultimately authorized.
- Whether credit trends remained favorable, including CRE and construction performance, commercial concentration, oil-and-gas exposures, charge-offs and adequacy of the allowance.
- The realized contribution and integration costs from Pacific Crest, and the financial consequences of discontinued-operation run-off and the education-loan trust transaction.
- Developments in the overdraft litigation and other legal matters, and whether the recorded reserves remained adequate.
- Reconcile the filing’s FHLB unused borrowing-capacity disclosures: the MD&A cites $2.8 billion in one section and $3.5 billion elsewhere.