KeyCorp 2011 Form 10-K Summary
Business context and reporting period
KeyCorp is an Ohio bank holding company headquartered in Cleveland, with $88.8 billion in consolidated assets at December 31, 2011. Through KeyBank and other subsidiaries, it provides retail and commercial banking, equipment finance, investment management, and investment banking services. Its two reportable segments are Key Community Bank and Key Corporate Bank. This 10-K covers the fiscal year ended December 31, 2011; annual figures below are not fourth-quarter-only results unless specified.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Net income attributable to Key | $920 million | $554 million |
| Net income attributable to common shareholders | $813 million; $0.87 per share | $390 million; $0.45 per share |
| Continuing-operations income attributable to common shareholders | $857 million; $0.92 per share | $413 million; $0.47 per share |
| Net interest income, GAAP | $2.267 billion | $2.511 billion |
| Net interest margin, taxable-equivalent | 3.16% | 3.26% |
| Noninterest income | $1.808 billion | $1.954 billion |
| Noninterest expense | $2.790 billion | $3.034 billion |
| Provision for loan and lease losses | $(60) million credit | $638 million expense |
| Operating cash flow | $1.890 billion | $2.724 billion |
- Total taxable-equivalent revenue was $4.1 billion, down 8.7%. Net interest income declined as average earning assets fell and the low-rate environment pressured yields; lower deposit costs partly offset this.
- Profitability recovered substantially, driven primarily by sharply lower credit costs and lower expenses. Net income from discontinued operations was a loss of $44 million in 2011, mainly from fair-value adjustments in the education-loan securitization trusts.
- Fourth-quarter continuing-operations income attributable to common shareholders was $201 million, or $0.21 per share, versus $292 million, or $0.33, in fourth-quarter 2010. The quarter included a $24 million Visa-related charge; the prior-year quarter included a $28 million gain on the sale of Tuition Management Systems.
- At year-end, total assets were $88.8 billion, loans $49.6 billion, deposits $62.0 billion, and long-term debt $9.5 billion. Loans declined 1% year over year, while deposits rose 2%. Shareholders’ equity was $9.9 billion.
- Credit metrics improved: net charge-offs fell to $541 million, or 1.11% of average loans, from $1.57 billion, or 2.91%. Nonperforming loans declined to $727 million from $1.07 billion; nonperforming assets fell to $859 million from $1.34 billion. The allowance was $1.00 billion, or 2.03% of period-end loans, versus $1.60 billion, or 3.20%.
- Capital remained above regulatory minimums: Tier 1 common equity ratio was 11.26% (9.34% in 2010), Tier 1 risk-based capital 12.99%, total risk-based capital 16.51%, and leverage 11.79%. The loan-to-deposit ratio was 87%.
- Cash and due from banks increased $416 million during 2011. Cash-flow totals were $1.890 billion provided by operations, $1.642 billion provided by investing activities, and $3.116 billion used in financing activities. These flows reflect substantial securities, deposit, debt, and capital transactions.
Material changes versus the prior comparable period
- Common-shareholder earnings from continuing operations more than doubled, while the provision shifted from a $638 million expense to a $60 million credit. Management cautioned that recent lower provisions benefited earnings and may not persist.
- Noninterest expense declined 8%, including lower FDIC assessments, OREO expense, operating-lease expense, and other costs; personnel expense increased with incentive compensation.
- Average loans fell during the year, but fourth-quarter average loans increased $656 million from the prior quarter, the first quarterly average-loan growth since fourth-quarter 2008. Commercial, financial, and agricultural lending showed a third consecutive quarter of average growth.
- Deposits shifted toward lower-cost transaction accounts: non-time deposits increased $5.4 billion, while higher-cost time deposits declined. The securities portfolio fell to approximately $18 billion from $22 billion; held-to-maturity securities rose to $2.1 billion, primarily from agency mortgage-backed securities.
- Key repurchased the U.S. Treasury’s $2.5 billion Series B TARP preferred stock in March 2011, funded in part by a $625 million common-stock offering and $1 billion senior-note issuance. A $49 million one-time deemed dividend was recorded; the repurchase eliminated about $140 million of annual preferred dividends and discount amortization.
- Key corrected a prior-period error in the accounting for consolidated education-loan securitization trusts in the third quarter. It reduced accrued income and other assets and retained earnings by $30 million; management said it was not material to prior periods and it did not affect earnings.
Outlook, risks, contingencies, and unusual items
- Management expected modest net interest margin improvement in 2012 as higher-cost certificates of deposit reprice, and anticipated continued asset-quality improvement. It expected first-half 2012 net charge-offs to be comparable to the second half of 2011 and provision expense to remain below net charge-offs, moving closer to charge-offs as loan growth continues.
- Long-term targets include net interest margin above 3.50%, efficiency ratio of 60%–65%, return on average assets of 1.00%–1.25%, and net charge-offs of 0.40%–0.50%. 2011 results were 3.16%, 68%, 1.17%, and 1.11%, respectively; the charge-off target remains a significant gap.
- Key planned continued cost control while investing in client-facing roles and technology. A January 2012 agreement to acquire 37 Buffalo and Rochester branches would add about $2.4 billion of deposits and $400 million of loans; closing was expected in late second or early third quarter of 2012, subject to approval. Key also planned about 20 new branches in 2012, versus 40 in 2011.
- Key had $11.2 billion in liquid assets and $2.1 billion in parent-company short-term investments at year-end. KeyBank had capacity to pay $1.3 billion in dividends to KeyCorp under applicable guidance as of January 1, 2012; bank dividend limits and supervisory review constrain parent-company liquidity and capital distributions. The Federal Reserve was reviewing Key’s 2012–2013 capital plan, including possible capital actions.
- Risks include a weak or renewed downturn in the economy, European sovereign-debt stress, commercial real estate and borrower credit deterioration, low rates and margin pressure, liquidity or credit-rating deterioration, and evolving Dodd-Frank and Basel III capital, liquidity, and compliance requirements. The filing estimated a potential annual debit-interchange revenue decline of $50–$60 million before offsets and 2012 FDIC assessment expense of $45–$60 million.
- Legal matters include Madoff-related claims involving Austin, ERISA litigation, and overdraft-fee litigation. Management said established reserves were adequate based on available information, but noted that litigation outcomes could exceed reserves and affect a particular period’s results. The Madoff/Austin proceedings were at an early stage and their ultimate financial effect was not clear.
- Management identified commercial real estate conditions, allowance estimates, fair values, deferred taxes, and litigation/guarantee exposures as areas involving significant judgment. Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- How much of the 2011 earnings rebound came from lower credit provisions and reserve releases, and whether charge-offs and nonperforming assets continue to improve.
- Whether loan growth is sustained and revenue and net interest margin recover despite low rates, debit-interchange limits, and continued declines in some fee businesses.
- Commercial real estate and other commercial-loan exposures, including concentrations, criticized assets, collateral values, and the adequacy of the $1.00 billion allowance.
- Results of the Federal Reserve’s capital-plan review, the timing and constraints on dividends or repurchases, and the effects of phasing out trust preferred securities from Tier 1 capital.
- Completion and economics of the 37-branch acquisition, including deposit retention, integration costs, and use of the acquired excess liquidity.
- Final exposure and outcomes for significant legal matters, the education-loan trust valuation and correction, and the assumptions underlying other material fair-value estimates.