KeyCorp — Q2 2015 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited; Ernst & Young performed an interim review, not an audit. KeyCorp is a bank holding company operating primarily through KeyBank, with Key Community Bank and Key Corporate Bank as its major segments. Dollar amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q2 2015 / June 30, 2015 | Comparable period / prior date |
|---|---|---|
| Net income attributable to Key | $238; diluted EPS $0.27 | Q2 2014: $219; diluted EPS $0.24 |
| Continuing-operations income attributable to Key common shareholders | $230; diluted EPS $0.27 | Q2 2014: $242; diluted EPS $0.27 |
| Taxable-equivalent revenue | $1,079 | Q2 2014: $1,034 |
| Net interest income / margin | $591 taxable-equivalent; 2.88% | Q2 2014: $579; 2.98% |
| Noninterest income / expense | $488 / $711 | Q2 2014: $455 / $687 |
| Provision for credit losses | $41 | Q2 2014: $12 |
| Total assets | $94.6 billion | June 30, 2014: $91.8 billion |
| Total loans / deposits | $58.3 billion / $70.7 billion | June 30, 2014: $55.6 billion / $67.8 billion |
| Long-term debt | $10.3 billion | December 31, 2014: $7.9 billion |
| Key shareholders’ equity | $10.6 billion | December 31, 2014: $10.5 billion |
| Allowance for loan and lease losses | $796; 1.37% of loans; 190% of nonperforming loans | June 30, 2014: $814; 1.46%; 205.6% |
- For the six months, net income attributable to Key was $471 versus $461 in 2014, while continuing-operations income attributable to Key common shareholders was $452 versus $474.
- Six-month cash flows: operating activities provided $59 versus $263 in 2014; investing activities used $835 versus providing $1,082; financing activities provided $816 versus using $1,358. Cash and due from banks ended at $693, up $40 since year-end 2014.
- At June 30, nonperforming loans were $419 and nonperforming assets were $440, compared with $396 and $410, respectively, a year earlier. Loans past due or nonperforming totaled $666, or about 1.2% of loans, versus $753, or 1.4%, a year earlier.
- Capital ratios were 10.71% Common Equity Tier 1, 11.11% Tier 1 risk-based, and 12.66% total risk-based. Tangible common equity to tangible assets was 9.86%, versus 10.15% a year earlier. Key estimated a 10.6% CET1 ratio on a fully phased-in regulatory basis.
Material changes and management commentary
- Q2 taxable-equivalent revenue grew 4.4% year over year, led by record investment banking and debt placement fees, stronger trust and investment services, and cards and payments income. Pacific Crest Securities, acquired in September 2014, contributed to fee and expense growth.
- Net interest income rose with earning-asset growth, but net interest margin fell 10 basis points year over year as asset yields declined and excess liquidity remained elevated.
- The credit-loss provision increased to $41 from $12 million. Management cited loan growth and lower recoveries; it expected full-year provision to approximate net charge-offs and charge-offs to remain below its 0.40%–0.60% target range.
- Average loans grew $2.4 billion year over year, principally in commercial, financial and agricultural lending. Average deposits excluding foreign-office deposits grew $3.8 billion, led by noninterest-bearing and NOW/money market balances.
- Q2 noninterest expense increased 3.5%, primarily from higher performance-based compensation and the Pacific Crest acquisition. Management expected 2015 expense to be relatively stable with 2014.
- Management’s 2015 outlook: absent higher interest rates, low-single-digit net interest income growth; a net interest margin relatively stable with Q2; mid-single-digit noninterest income growth; and mid-single-digit average loan growth.
Outlook, capital, risks and unusual items
- The Federal Reserve did not object to Key’s 2015 capital plan. It authorized up to $725 million of share repurchases through Q2 2016; $129 million was repurchased in Q2. The quarterly common dividend increased from $0.065 to $0.075 per share; a possible increase to $0.085 may be considered in 2016.
- Key reported estimated Modified Liquidity Coverage Ratio above 100% for Q2; the rule’s minimum requirements begin in 2016. Its liquid asset portfolio was $15.4 billion, with additional unused secured borrowing capacity of $19.4 billion at the Federal Reserve Bank of Cleveland and $2.8 billion at the FHLB.
- Key issued $1.75 billion of KeyBank senior notes in June 2015, in three tranches, contributing to the increase in long-term debt. The filing says the issuance supported liquidity and the bank’s credit-rating profile.
- Education lending remains a discontinued operation. Key sold the residual interests in its education-loan securitization trusts in 2014; at June 30, 2015, $179 million of education loans were held for sale within discontinued operations. Q2 discontinued operations contributed $3 million after tax versus a $28 million loss in Q2 2014.
- Guarantees had maximum potential undiscounted payments of $14.7 billion, with $154 million recorded as liabilities; management assessed payment/performance risk as low. The filing discusses ongoing litigation and states that other matters are not expected to have a material adverse effect, while noting outcomes could exceed reserves.
- Key identifies credit deterioration, commercial real estate and commercial lending concentrations, interest-rate and liquidity changes, regulation, cybersecurity and operational failures, litigation, and economic weakness among material risks. It reported no material changes to internal control over financial reporting during the quarter.
Most important facts for an investor to verify
- Whether fee growth—particularly investment banking—can persist and how much reflects Pacific Crest Securities or unusually strong activity.
- Whether margin pressure, deposit mix and higher long-term debt costs affect the stated 2015 earnings outlook.
- Why credit-loss provisioning rose sharply, and whether commercial nonperforming loans and the largest troubled exposures worsen; the 20 largest nonperforming loans totaled $120 million versus $55 million a year earlier.
- How the $725 million repurchase authorization, higher dividend and regulatory capital requirements affect capital flexibility.
- Whether liquidity remains adequate as regulatory requirements phase in, and whether discontinued education-loan assets and legal or guarantee exposures produce further losses.