KeyCorp 2017 First-Quarter Form 10-Q
Business context and reporting period
KeyCorp reported results for the three months ended March 31, 2017. The bank operates through Key Community Bank and Key Corporate Bank. Results include First Niagara, acquired August 1, 2016, so year-over-year comparisons reflect the acquisition and are not like-for-like.
Financial and operating metrics
| Metric | Q1 2017 | Comparison |
|---|---|---|
| Net interest income (GAAP) | $918 million | $604 million in Q1 2016 |
| Net interest income (taxable-equivalent) | $929 million | $612 million in Q1 2016 |
| Net interest margin (taxable-equivalent) | 3.13% | 2.89% in Q1 2016 |
| Noninterest income | $577 million | $431 million in Q1 2016 |
| Noninterest expense | $1.013 billion | $703 million in Q1 2016; includes $81 million of merger-related charges |
| Provision for credit losses | $63 million | $89 million in Q1 2016 |
| Net income attributable to Key | $324 million | $188 million in Q1 2016 |
| Net income attributable to common shareholders / diluted EPS | $296 million / $0.27 | $183 million / $0.22 in Q1 2016 |
| Operating cash flow | $(405) million | $373 million in Q1 2016 |
At March 31, 2017, total assets were $134.5 billion, loans $86.1 billion, deposits $104.0 billion, and long-term debt $12.3 billion. Shareholders’ equity was $15.0 billion. The loan-to-deposit ratio was 85.6%. The reported Common Equity Tier 1 ratio was 9.91%; the estimated fully phased-in ratio was 9.83%. The Modified Liquidity Coverage Ratio was above the 100% minimum. Key reported a $22.2 billion liquid asset portfolio and additional secured borrowing capacity of $29.7 billion.
Credit indicators improved from year-end: nonperforming loans were $573 million, down from $625 million, and nonperforming assets were $623 million, down from $676 million. Net charge-offs were $58 million, or 0.27% of average loans. The allowance for loan and lease losses was $870 million, 1.01% of period-end loans. Cash and due from banks declined to $549 million; cash flows were also affected by substantial investing inflows and financing outflows.
Material changes versus comparable periods
- Versus Q1 2016, Key-attributable net income rose to $324 million from $188 million; common diluted EPS increased to $0.27 from $0.22. Management attributed revenue gains to First Niagara, higher earning-asset yields and balances, and stronger capital-markets activity.
- Net interest income benefited from $53 million of First Niagara purchase-accounting accretion. Noninterest income rose 33.9% year over year, including a $56 million increase in investment banking and debt placement fees.
- Noninterest expense increased 44.1% year over year. Excluding merger-related charges, it was $932 million, up $253 million, mainly due to First Niagara and higher incentive and stock-based compensation.
- Compared with Q4 2016, taxable-equivalent net interest income fell $19 million, largely because of lower purchase-accounting accretion and two fewer days in the quarter. The margin increased one basis point to 3.13%.
Guidance, outlook, risks and unusual items
- For full-year 2017, management expected net interest income of $3.7–$3.8 billion, assuming one additional rate increase around midyear; noninterest income of $2.3–$2.4 billion; and noninterest expense, excluding merger charges, of $3.65–$3.75 billion.
- Management projected 4%–6% loan growth from Q4 2016, average loans of $87–$88 billion, and average deposits of $104–$105 billion. It expected credit-loss provision to slightly exceed net charge-offs and charge-offs to remain below its 0.40%–0.60% target range.
- Long-term targets include a cash efficiency ratio below 60% and return on tangible common equity of 13%–15%. Q1 reported figures were 65.8% and 10.98%; excluding merger charges, the ratios were 60.4% and 12.87%, respectively.
- The $81 million of merger-related charges included $30 million of personnel costs and $51 million of nonpersonnel costs, including a $20 million philanthropic contribution. Final First Niagara acquired-loan valuations remained provisional; management expected to complete them in Q2 2017.
- Key cited credit migration and commercial and industrial concentration, commercial real-estate conditions, interest-rate and funding risks, regulatory requirements, cybersecurity and operational risks, litigation, and the ability to achieve First Niagara integration benefits as risks. Management said other litigation was not expected to have a material adverse effect based on information then available, but outcomes could exceed reserves.
- Key had $17.8 billion of maximum potential undiscounted payments under listed guarantees, with $126 million of related liabilities recorded; management assessed payment/performance risk as low. It also reported $1.2 billion of LIHTC investments and associated commitments and tax-credit recapture exposure.
Important facts for investors to verify
- Track whether First Niagara integration produces the expected growth and cost savings, and whether acquired-loan valuations and purchase-accounting accretion are finalized as anticipated.
- Compare reported and merger-adjusted expenses, cash efficiency, and returns with management’s full-year outlook and long-term targets.
- Monitor credit migration, commercial real-estate and C&I exposures, charge-offs, nonperforming assets, and allowance adequacy.
- Confirm capital and liquidity remain adequate as lending grows, deposits fluctuate, regulatory requirements evolve, and planned capital returns continue. The Board was to consider a common dividend increase to $0.095 per share for Q2.
- Review legal proceedings, guarantees, and other contingencies for developments that could change recorded reserves or potential exposure.