01—Abstract
Summary
Summary of the 10-K filed February 25, 2019. Cited figures are marked; the original filing is the authoritative source.
KeyCorp (KEY) reported consolidated total assets of approximately $139.6 billiona at December 31, 2018, operating through two business segments, Key Community Bank and Key Corporate Bank, with 1,159 branches and 1,505 ATMs across 15 states.
For 2018, net income attributable to Key was $1.866 billionb, compared with $1.296 billion in 2017, and income from continuing operations attributable to Key common shareholders was $1.793 billion. Diluted EPS from continuing operations was $1.70, up from $1.12. The filing attributes the earnings improvement largely to the Tax Cuts and Jobs Act, which lowered the effective tax rate to 15.6% from 33.0%, alongside a record $6.4 billion in total revenue and a cash efficiency ratio of 60.0%, down from 63.5%.
Capital position and shareholder returns were central to 2018. The Common Equity Tier 1 ratio was 9.93% and Tier 1 risk-based capital was 11.08%, both above regulatory requirements. KeyCorp repurchased $1.145 billionc of common shares during 2018 under its capital plans, and the full-year dividend rose to $.565 per common share from $.38.
Management's 2019 outlook calls for TE net interest income of $4.0 billion to $4.1 billiond, noninterest expense of $3.85 billion to $3.95 billion, and a GAAP tax rate of 18% to 19%. Key risks flagged in the filing include pending adoption of ASU 2016-13 (current expected credit losses), which management says will generally increase the allowance for credit losses, though the quantitative impact cannot yet be reasonably estimated.
Commercial and industrial loans rose to $45.8 billion, and commercial loans make up 74% of the portfolio. Net loan charge-offs were .26% of average loans, below the company's 40% to 60 basis point target range, and nonperforming loans were $542 million.
02—Key points
Key Highlights
- Net income attributable to Key rose to $1.866 billion in 2018 from $1.296 billion in 2017, with diluted EPS from continuing operations of $1.70 versus $1.12.
- The effective tax rate fell to 15.6% from 33.0%, driven by the Tax Cuts and Jobs Act; the company expects a GAAP tax rate of 18% to 19% in 2019.
- Total revenue reached a record $6.4 billion, and the cash efficiency ratio improved to 60.0% from 63.5%, with a target range of 54.0% to 56.0% by the second half of 2019.
- Common Equity Tier 1 ratio was 9.93% and Tier 1 risk-based capital ratio was 11.08% at December 31, 2018, with all capital ratios above regulatory requirements.
- Repurchased $1.145 billion of common shares in 2018 and raised the annual dividend to $.565 per share from $.38 in 2017.
- Net loan charge-offs were .26% of average loans, below the targeted .40% to .60% range; nonperforming loans totaled $542 million.
- Pending adoption of ASU 2016-13 (CECL) is expected to generally increase the allowance for credit losses; the quantitative impact cannot yet be reasonably estimated.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 25, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $6.46B$6.31B | +2.3% |
| Operating Income | $1.86B$1.29B | +44.2% |
| Interest Expense | $969.00M$613.00M | +58.1% |
| Net Income | $1.87B$1.30B | +44.0% |
| EPS (Basic) | $1.73$1.14 | +51.8% |
| EPS (Diluted) | $1.71$1.13 | +51.3% |
| Shares Outstanding (Basic) | 1.04B1.07B | −2.9% |
| Shares Outstanding (Diluted) | 1.05B1.09B | −3.1% |
05—Questions
Frequently Asked Questions
What drove the large increase in KeyCorp's 2018 net income?
The filing attributes the increase mainly to the Tax Cuts and Jobs Act, which reduced the effective tax rate to 15.6% from 33.0%. Income tax expense fell to $344 million from $637 million, while income from continuing operations before income taxes rose to $2.203 billion from $1.928 billion. Growth in core businesses and expense discipline also contributed, with Key Community Bank's net income rising to $942 million from $658 million.
How did the two business segments perform in 2018?
Key Community Bank's net income attributable to Key rose 43.2% to $942 million, while Key Corporate Bank's declined 3.5% to $789 million. Corporate Bank's decline reflected lower revenue, higher provision for credit losses, and higher noninterest expense. Total revenue for Key Community Bank was $3.971 billion (TE) and for Key Corporate Bank was $2.255 billion (TE).
How much capital did KeyCorp return to shareholders in 2018?
KeyCorp repurchased $325 million of common shares under its 2017 capital plan and $820 million under its 2018 capital plan, for a total of $1.145 billion. Its 2018 capital plan, not objected to by the Federal Reserve, authorizes up to $1.225 billion of repurchases. Quarterly dividends increased during the year, bringing the 2018 total to $.565 per common share.
What accounting change could affect KeyCorp's future earnings and capital?
KeyCorp must adopt ASU 2016-13 (Measurement of Credit Losses on Financial Instruments) by January 1, 2020, with early adoption permitted as of January 1, 2019. The standard replaces the incurred loss model with an expected loss model. Management expects the change to generally increase the allowance for credit losses, and notes that it could negatively affect the allowance and capital at adoption, though the quantitative impact cannot yet be reasonably estimated.
06—Continue