KeyCorp Continues Earnings Momentum, Reports Third Quarter 2011 and Year-to-Date Net Income of $229 Million and $656 Million

CLEVELAND, Oct. 20, 2011 /PRNewswire/ --

• Net income from continuing operations of $229 million, or $.24 per common share, for the third quarter of 2011
• Year-to-date net income from continuing operations of $656 million, or $.71 per common share
• Net interest margin at 3.09% for the third quarter of 2011
• Nonperforming loans declined to $788 million, or 1.64% of period-end loans, and nonperforming assets decreased to $914 million
• Loan loss reserve at 2.35% of total period-end loans and 144% of nonperforming loans at September 30, 2011
• Third quarter of 2011 net charge-offs of $109 million, or .90% of average loan balances
• Tier 1 common equity and Tier 1 risk-based capital ratios estimated at 11.34% and 13.55%, respectively, at September 30, 2011

KeyCorp (NYSE: KEY) today announced third quarter net income from continuing operations attributable to Key common shareholders of $229 million, or $.24 per common share.  Key's third quarter 2011 results compare to net income from continuing operations attributable to Key common shareholders of $163 million, or $.19 per common share, for the third quarter of 2010.  The results for the third quarter of 2011 reflect an improvement in noninterest expense and lower credit costs from the same period one year ago.  Third quarter 2011 net income attributable to Key common shareholders was $212 million compared to net income attributable to Key common shareholders of $178 million for the same quarter one year ago.  

For the nine-month period ended September 30, 2011, net income from continuing operations attributable to Key common shareholders was $656 million, or $.71 per common share, compared to net income from continuing operations attributable to Key common shareholders of $121 million, or $.14 per common share, for the same period one year ago.  Net income attributable to Key common shareholders for the nine-month period ended September 30, 2011, was $619 million compared to net income attributable to Key common shareholders of $111 million for the same period one year ago.

During the third quarter of 2011, the Company continued to benefit from improved asset quality.  Nonperforming loans decreased by $584 million and nonperforming assets declined by $887 million from the year-ago quarter to $788 million and $914 million, respectively.  Net charge-offs declined to $109 million, or .90% of average loan balances for the third quarter of 2011, compared to $357 million, or 2.69% of average loan balances for the same period one year ago.

Chairman and Chief Executive Officer Beth Mooney stated, "Our financial results demonstrate consistent positive momentum for Key as we continue executing our relationship strategy, improving credit quality and maintaining disciplined expense control.  We are also pleased that our commercial, financial and agricultural loan portfolio grew for the second consecutive quarter.  Our clients continue to benefit from our ability to work together across business lines to deliver value by combining local knowledge and service with specialized industry expertise and advisory capabilities."

Mooney continued:  "We look forward to continuing our support of small- and medium-sized businesses and have committed $5 billion in lending capital over the next three years to foster growth and expansion in this important segment."

At September 30, 2011, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios were 11.34% and 13.55%, compared to 11.14% and 13.93%, respectively, at June 30, 2011.

The Company originated approximately $9.7 billion in new or renewed lending commitments to consumers and businesses during the quarter.    

The following table shows Key's continuing and discontinued operating results for the comparative quarters and for the nine-month periods ended September 30, 2011 and 2010.

SUMMARY OF CONTINUING OPERATIONS

Taxable-equivalent net interest income was $555 million for the third quarter of 2011, and the net interest margin was 3.09%.  These results compare to taxable-equivalent net interest income of $647 million and a net interest margin of 3.35% for the third quarter of 2010.  The decrease in net interest income is attributable to both a decline in earning assets and tighter spread between asset yields and funding costs.

Compared to the second quarter of 2011, taxable-equivalent net interest income decreased by $15 million, and the net interest margin declined 10 basis points.  The decline in the net interest margin and net interest income reflects a higher level of lower yielding short-term investments. The unfavorable impact of the shift in asset mix was partially offset by rate reductions on deposits, maturities of higher rate certificates of deposit, and the impact of the redemptions on September 1, 2011, of certain capital securities.  

Key's noninterest income was $483 million for the third quarter of 2011, compared to $486 million for the year-ago quarter.  Compared to the same period one year ago, investment banking and capital markets income decreased $17 million, operating lease income declined $11 million and corporate-owned life insurance income decreased $8 million due to a $12 million dividend recognized in the third quarter of 2010.  Letter of credit and loan fees also decreased $6 million from one year ago.  These declines were offset by increases of $16 million in net gains (losses) from principal investing (including results attributable to noncontrolling interests) and $24 million in other income, which included a $13 million gain associated with the redemption of certain capital securities.

The major components of Key's noninterest income for the past five quarters are shown in the following table.

Compared to the second quarter of 2011, noninterest income increased by $29 million.  The increase was a result of higher net gains (losses) from principal investing (including results attributable to noncontrolling interests) of $17 million and other income of $15 million which included a $13 million gain associated with the redemption of certain capital securities.  Also contributing to the improvement in noninterest income were increases of $8 million in letter of credit and loan fees, $7 million in net gains (losses) from loan sales and $5 million in service charges on deposit accounts. These increases were partially offset by decreases in investment banking and capital markets income of $17 million and trust and investment services income of $6 million.

Key's noninterest expense was $692 million for the third quarter of 2011, compared to $736 million for the same period last year.  The improvement in expense levels resulted from declines of $20 million in FDIC deposit insurance premiums, $17 million in operating lease expense, and $28 million in various other miscellaneous expenses.  These decreases were partially offset by a $23 million increase in personnel expense, which included a $10 million increase to pension expense.  

Compared to the second quarter of 2011, noninterest expense increased by $12 million, primarily as a result of an $11 million decrease in the credit for losses on lending-related commitments.  Marketing expense also increased $6 million as Key continues to promote, support and advertise relationship-based products, services and capabilities.  These increases were partially offset by decreases in various miscellaneous expenses.

ASSET QUALITY

Key's provision for loan and lease losses was a charge of $10 million for the third quarter of 2011, compared to a charge of $94 million for the year-ago quarter and a credit of $8 million for the second quarter of 2011.  Key's allowance for loan and lease losses was $1.1 billion, or 2.35% of total period-end loans, at September 30, 2011, compared to 2.57% at June 30, 2011, and 3.81% at September 30, 2010.

Selected asset quality statistics for Key for each of the past five quarters are presented in the following table.

Net loan charge-offs for the quarter totaled $109 million, or .90% of average loans.  These results compare to $357 million, or 2.69%, for the same period last year and $134 million, or 1.11%, for the previous quarter.  Net loan charge-offs have declined for the last seven consecutive quarters.  For the first time since the first quarter of 2008, the percentage of net loan charge-offs to average loans is less than one percent.

Key's net loan charge-offs by loan type for each of the past five quarters are shown in the following table.

Compared to the second quarter of 2011, net loan charge-offs in the commercial loan portfolio decreased by $18 million which was primarily attributable to a decline in the real estate – construction and commercial, financial and agricultural categories.  As shown in the table on page 6, Key's exit loan portfolio accounted for $27 million, or 24.8%, of Key's total net loan charge-offs for the third quarter of 2011.  Net charge-offs in the exit loan portfolio increased by $2 million from the second quarter of 2011, primarily driven by an increase in net charge-offs in the marine loan portfolio.

At September 30, 2011, Key's nonperforming loans totaled $788 million and represented 1.64% of period-end portfolio loans, compared to 1.76% at June 30, 2011, and 2.67% at September 30, 2010.  Nonperforming assets at September 30, 2011, totaled $914 million and represented 1.89% of portfolio loans and OREO and other nonperforming assets, compared to 1.98% at June 30, 2011, and 3.48% at September 30, 2010.  The following table illustrates the trend in Key's nonperforming assets by loan type over the past five quarters.

Nonperforming assets continued to decrease during the third quarter of 2011, representing the eighth consecutive quarterly decline.  As shown in the following table, Key's exit loan portfolio accounted for $119 million, or 13.0%, of Key's total nonperforming assets at September 30, 2011.

The following table shows the composition of Key's exit loan portfolio at September 30, 2011, and June 30, 2011, the net charge-offs recorded on this portfolio for the second and third quarters of 2011, and the nonperforming status of these loans at September 30, 2011, and June 30, 2011.

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at September 30, 2011.

As shown in the preceding table, at September 30, 2011, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios stood at 11.34% and 13.55%, respectively.  In addition, the tangible common equity ratio was 9.82% at September 30, 2011.

Based upon current expectations and subject to Key's regulators issuance of the final capital planning guidelines, the Company expects its capital planning process to include assessment of certain capital distributions, including potential dividend increases and share repurchases.  

The changes in Key's outstanding common shares over the past five quarters are summarized in the following table.

During the first quarter of 2011, Key successfully completed a $625 million common equity offering and a $1 billion debt offering.  The proceeds from the equity and debt offerings, along with other available funds, were used to repurchase the $2.5 billion of Fixed-Rate Perpetual Preferred Stock, Series B issued to the U.S. Treasury Department as a result of Key's participation in the U.S. Treasury's Capital Purchase Program.  

LINE OF BUSINESS RESULTS

The following table shows the contribution made by each major business segment to Key's taxable-equivalent revenue from continuing operations and income (loss) from continuing operations attributable to Key for the periods presented.  The specific lines of business that comprise each of the major business segments are described under the heading "Line of Business Descriptions."  For more detailed financial information pertaining to each business segment and its respective lines of business, see the tables at the end of this release.  

Key Community Bank Summary of Operations

Key Community Bank recorded net income attributable to Key of $58 million for the third quarter of 2011, compared to net income attributable to Key of $53 million for the year-ago quarter.  Decreases in the provision for loan and lease losses and noninterest expense were partially offset by lower net interest income in the third quarter of 2011.

Taxable-equivalent net interest income declined by $32 million, or 8%, from the third quarter of 2010.  Average earning assets decreased by $557 million, or 2%, from the year-ago quarter, reflecting reductions in the commercial and home equity loan portfolios.  Average deposits declined by $1 billion, or 2%, as higher-costing certificates of deposit matured, partially offset by growth in noninterest-bearing deposits and NOW and money market deposit accounts.

Noninterest income increased by $1 million, or 1%, from the year-ago quarter, primarily due to higher income from electronic banking fees and letter of credit and loan fees.  This was partially offset by lower insurance income.

The provision for loan and lease losses declined by $36 million, or 48%, compared to the third quarter of 2010 due to lower net charge-offs and nonperforming loans from the same period one year ago.

Noninterest expense declined by $3 million, or 1%, from the year-ago quarter.  The decrease was driven by reductions in FDIC deposit insurance premiums of $18 million, partially offset by increases in personnel expense and real estate costs associated with investments in Key's branch network.

Key Corporate Bank Summary of Operations

Key Corporate Bank recorded net income attributable to Key of $122 million for the third quarter of 2011, compared to net income attributable to Key of $134 million for the same period one year ago.  This decline was driven by lower net interest income and investment banking and capital markets income.  The decrease in revenues was partially offset by a significant decline in noninterest expense. The provision for loan and lease losses also decreased as net charge-offs significantly declined between periods.

Taxable-equivalent net interest income decreased by $29 million, or 15%, compared to the third quarter of 2010, due to lower average deposits and average earning assets.  Average deposits declined by $1 billion, or 9%, from one year ago primarily as a result of the movement of $1.5 billion in escrow balances out of the Real Estate Capital line of business to a third party in the first quarter of 2011.  Average earning assets decreased by $2.9 billion, or 13%, from the year-ago quarter, while lower levels of nonperforming assets and better pricing helped to partially offset volume-related declines.

Noninterest income declined by $27 million, or 12%, from the third quarter of 2010.  Contributing to the decline in noninterest income was the impact from a slowing merger and acquisition market and the third quarter volatility in the capital markets, which resulted in a decrease in investment banking and capital markets income of $18 million.  In addition, letter of credit and loan fees and operating lease revenue both decreased $7 million from the year-ago quarter. These declines were partially offset by improvements in gains on leased equipment of $5 million and mortgage banking fees of $3 million.

The provision for loan and lease losses in the third quarter of 2011 was a credit of $40 million compared to a credit of $25 million for the same period one year ago.  Key Corporate Bank continued to experience improved asset quality for the eighth quarter in a row.

Noninterest expense decreased by $21 million, or 9%, from the third quarter of 2010.   Contributing to the improvement in expense levels were decreases in operating lease expense of $7 million, corporate support costs of $5 million, and various other miscellaneous expense items of $11 million.  Personnel expense also declined $4 million as a result of lower investment banking and capital markets income.  These improvements were partially offset by an increase in the provision for losses on lending-related commitments of $5 million.

Other Segments

Other Segments consist of Corporate Treasury, Key's Principal Investing unit and various exit portfolios.  Other Segments generated net income attributable to Key of $55 million for the third quarter of 2011, compared to net income attributable to Key of $17 million for the same period last year.  These results were primarily attributable to a decrease in the provision for loan and lease losses of $34 million in the exit portfolio.

Line of Business Descriptions

Key Community Bank

Regional Banking provides individuals with branch-based deposit and investment products, personal finance services and loans, including residential mortgages, home equity and various types of installment loans.  This line of business also provides small businesses with deposit, investment and credit products, and business advisory services.

Regional Banking also offers financial, estate and retirement planning, and asset management services to assist high-net-worth clients with their banking, trust, portfolio management, insurance, charitable giving and related needs.

Commercial Banking provides midsize businesses with products and services that include commercial lending, cash management, equipment leasing, investment and employee benefit programs, succession planning, access to capital markets, derivatives and foreign exchange.  

Key Corporate Bank

Real Estate Capital and Corporate Banking Services consists of two business units, Real Estate Capital and Corporate Banking Services.

Real Estate Capital is a national business that provides construction and interim lending, permanent debt placements and servicing, equity and investment banking, and other commercial banking products and services to developers, brokers and owner-investors.  This unit deals primarily with nonowner-occupied properties (i.e., generally properties in which at least 50% of the debt service is provided by rental income from nonaffiliated third parties).  Real Estate Capital emphasizes providing clients with finance solutions through access to the capital markets.  

Corporate Banking Services provides cash management, interest rate derivatives, and foreign exchange products and services to clients served by both the Key Community Bank and Key Corporate Bank groups.  Through its Public Sector and Financial Institutions businesses, Corporate Banking Services also provides a full array of commercial banking products and services to government and not-for-profit entities and community banks.  A variety of cash management services are provided through the Global Treasury Management unit.

Equipment Finance meets the equipment leasing needs of companies worldwide and provides equipment manufacturers, distributors and resellers with financing options for their clients.  Lease financing receivables and related revenues are assigned to other lines of business (primarily Institutional and Capital Markets and Commercial Banking) if those businesses are principally responsible for maintaining the relationship with the client.

Institutional and Capital Markets, through its KeyBanc Capital Markets unit, provides commercial lending, treasury management, investment banking, derivatives, foreign exchange, equity and debt underwriting and trading, and syndicated finance products and services to large corporations and middle-market companies.

Institutional and Capital Markets, through its Victory Capital Management unit, also manages or offers advice regarding investment portfolios for a national client base, including corporations, labor unions, not-for-profit organizations, governments and individuals.  These portfolios may be managed in separate accounts, common funds or the Victory family of mutual funds.

Cleveland-based KeyCorp (NYSE: KEY) is one of the nation's largest bank-based financial services companies, with assets of approximately $89 billion at September 30, 2011. Key companies provide investment management, retail and commercial banking, and investment banking products and services to individuals and companies throughout the United States and, for certain businesses, internationally. In 2010, KeyBank scored significantly higher than its four largest competitor banks in a customer satisfaction survey conducted by the American Customer Satisfaction Index and significantly better than bank industry scores across multiple dimensions, most notably Customer Loyalty.  Key also has been recognized for excellence in numerous areas of the multi-channel customer banking experience, including Corporate Insight's 2010 edition of Bank Monitor for online service.  For more information about Key, visit https://www.key.com/.

Notes to Editors:

A live Internet broadcast of KeyCorp's conference call to discuss quarterly results and currently anticipated earnings trends and to answer analysts' questions can be accessed through the Investor Relations section at https://www.key.com/ir at 9:00 a.m. ET, on Thursday, October 20, 2011.  An audio replay of the call will be available through October 27, 2011.

For up-to-date company information, media contacts and facts and figures about Key's lines of business, visit our Media Newsroom at https://www.key.com/newsroom.

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about Key's financial condition, results of operations, earnings outlook, asset quality trends and profitability.  Forward-looking statements are not historical facts but instead represent only management's current expectations and forecasts regarding future events, many of which, by their nature, are inherently uncertain and outside of Key's control.  Key's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.  Factors that could cause Key's actual results to differ materially from those described in the forward-looking statements can be found in KeyCorp's Annual Report on Form 10-K for the year ended December 31, 2010, and its Quarterly Reports on Form 10-Q for the periods ended March 31, 2011, and June 30, 2011, which have been filed with the Securities and Exchange Commission and are available on Key's website (www.key.com/ir) and on the Securities and Exchange Commission's website (www.sec.gov). Forward-looking statements are not guarantees of future performance and should not be relied upon as representing management's views as of any subsequent date.  Key does not undertake any obligation to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

SOURCE KeyCorp