KeyCorp Reports Third Quarter Net Income of $214 Million

Net interest income increases 6% from prior quarter

Continued loan growth driven by commercial and small businesses

Improved mix of earning assets and funding

Net interest margin expands 17 basis points from second quarter 2012

CLEVELAND, Oct. 18, 2012 /PRNewswire/ -- KeyCorp (NYSE: KEY) today announced third quarter net income from continuing operations attributable to Key common shareholders of $214 million, or $.23 per common share, compared to $221 million, or $.23 per common share for the second quarter of 2012, and $229 million, or $.24 per common share for the third quarter of 2011. For the nine months ended September 30, 2012, net income from continuing operations attributable to Key common shareholders was $634 million, or $.67 per common share, compared to $656 million, or $.71 per common share for the same period one year ago.

SIGNIFICANT EVENTS

Strategic acquisitions enhance revenue and contribute to higher noninterest expense, provision

• Completed branch and credit card acquisitions, improving asset and funding mix
• Acquisition of branches and credit card portfolio included one-time costs of $8 million and amortization expense of $8 million

Early termination of leveraged lease transactions

• Continued opportunity to realize economic benefit in low interest rate environment
• Realized nontaxable net gain of $26 million
• Net interest margin negatively impacted by seven (7) basis points due to the write-off of capitalized loan origination costs

Provision for loan losses impacted by acquisitions and updated guidance

• Acquired credit card portfolios and branch loans increased provision by $32 million
• Updated regulatory guidance increased net loan charge-offs and provision by $45 million

Executing on capital management priorities

• Repurchased 9.6 million Common Shares
• Redeemed $707 million of trust preferred securities realizing a $54 million gain

"During the third quarter, Key announced a number of actions aimed at enhancing the company's franchise, product offerings and profitability. We re-entered the credit card business, repositioned our merchant services and debit card processing, and improved market share with a 37-branch acquisition in Western New York," said Chairman and Chief Executive Officer Beth E. Mooney.

"Our third quarter results reflect the impact of these actions and underscore the company's sustained drive to increase revenue and reduce costs," Mooney continued. "Revenue trends benefited from the acquisitions, higher net interest margin due to lower funding costs, and the fourth consecutive quarter of average loan growth, primarily in our commercial, financial and agricultural portfolio. On the cost side, we made progress on our efficiency initiative goal and remain on track to capture $150 million to $200 million annual expense reductions by December 2013."

THIRD QUARTER 2012 FINANCIAL RESULTS

• Net interest income of $578 million, up $34 million from prior quarter
• Continued loan growth driven by 5.1% quarterly increase in commercial, financial and agricultural loans
• Net interest margin of 3.23%, up 17 basis points from prior quarter due to improved mix of earning assets and lower funding cost
• Provision for loan and lease losses increased $88 million, primarily due to acquisitions and the application of the recently updated regulatory guidance
• Asset quality trends impacted by updated regulatory guidance; net charge-offs increased $32 million, nonperforming assets down
• Maintained solid balance sheet with Tier 1 common equity of 11.4%

Taxable-equivalent net interest income was $578 million for the third quarter of 2012, and the net interest margin was 3.23%. These results compare to taxable-equivalent net interest income of $555 million and a net interest margin of 3.09% for the third quarter of 2011. The increase in net interest income and the net interest margin was primarily a result of a change in funding mix from the redemption of certain trust preferred securities and the continued maturity of higher-costing certificates of deposit and long-term debt during the third quarter of 2012. This funding was replaced with lower-cost deposits obtained through Key's branch acquisition, and an overall increase in demand deposits. The improvement in net interest income and the net interest margin was partially offset by a $13 million reduction to net interest income from the write-off of capitalized loan origination costs due to the early termination of leveraged leases, resulting in a seven (7) basis point decline in the net interest margin for the third quarter of 2012.

Compared to the second quarter of 2012, taxable-equivalent net interest income increased by $34 million, and the net interest margin improved by 17 basis points. The improvement was driven largely by lower funding costs, the redemption of trust preferred securities, the maturity of long-term debt in both the second and third quarters of 2012, and the maturity of higher rate certificates of deposit. The favorable impact of Key's credit card portfolio acquisition in the third quarter was largely offset by lower reinvestment yields on investment securities and other loans. The write-off of fees and capitalized loan origination costs from the early termination of leveraged leases was $13 million in both the second and third quarters of 2012.

Key's noninterest income was $544 million for the third quarter of 2012, compared to $483 million for the year-ago quarter. Gains on leased equipment increased $39 million compared to the same period one year ago, primarily related to the early terminations of leveraged leases. Net gains (losses) from loan sales also increased $21 million from the year-ago quarter. Other income was $48 million higher due to a $54 million gain associated with the redemption of certain trust preferred securities in the third quarter of 2012. Investment banking and capital markets income (loss) also increased $13 million from one year ago. These increases in noninterest income were partially offset by a $23 million decrease in net gains (losses) from principal investing (including results attributable to noncontrolling interests), a $15 million decrease in electronic banking fees as a result of government pricing controls on debit transactions that went into effect October 1, 2011, and a $13 million decline in operating lease income.

Compared to the second quarter of 2012, noninterest income increased by $59 million. Other income increased $56 million resulting from a $54 million gain associated with the redemption of certain trust preferred securities in the third quarter of 2012 and an increase in credit card fees of $7 million primarily due to the credit card portfolio acquisition. Gains on leased equipment also increased $10 million, primarily related to the early terminations of leveraged leases in the third quarter of 2012. These increases in noninterest income were partially offset by a decline in net gains (losses) from principal investing (including results attributable to noncontrolling interests) of $13 million.

Key's noninterest expense was $734 million for the third quarter of 2012, compared to $692 million for the same period last year. Personnel expense increased $29 million due to increased salaries and incentive compensation expense resulting from the hiring of client-facing personnel and Key's acquisition of 37 branches in Western New York, which closed on July 13. Nonpersonnel expense increased $13 million from one year ago and included an increase of $8 million related to the amortization of the intangible assets associated with the third quarter 2012 acquisitions of the previously discussed credit card portfolio as well as the branches. Various other expenses also increased $14 million. These increases in noninterest expense were partially offset by a $10 million decrease in operating lease expense compared to the same period one year ago. The provision (credit) for losses on lending-related commitments was a credit of $8 million compared to a credit of $1 million for the year-ago quarter.

Compared to the second quarter of 2012, noninterest expense increased by $20 million. Personnel expense increased $22 million, primarily attributable to an increase in incentive compensation, and nonpersonnel expense decreased by $2 million. Included in nonpersonnel expense was an increase of $8 million related to the amortization of the intangible assets associated with the third quarter 2012 acquisitions of the previously discussed credit card portfolio and branches. The increase in amortization expense was offset by a decline in the provision (credit) for losses on lending-related commitments, which was a credit of $8 million in the current quarter compared to a charge of $6 million in the prior quarter, and a decrease in other real estate owned ("OREO") expense of $6 million compared to the prior quarter.

BALANCE SHEET HIGHLIGHTS

As of September 30, 2012, Key had total assets of $87.0 billion compared to $86.5 billion at June 30, 2012, and $89.3 billion at September 30, 2011.

Average loans were $50.7 billion for the third quarter of 2012, an increase of $2.7 billion compared to the third quarter of 2011. Commercial, financial and agricultural loans grew by $4.1 billion over the year-ago quarter, with strong growth across Key's commercial and middle market segments. This growth was partially offset by declines in the commercial real estate portfolio, the equipment lease portfolios resulting from the early termination of certain leveraged leases in the exit portfolio, and run-off of consumer loans in the designated exit portfolio.

Compared to the second quarter of 2012, average loans increased by $1.2 billion. Commercial, financial and agricultural loans grew $867 million, and home equity loans increased $350 million as a result of Key's home equity loan campaign. The branch acquisition added $223 million of mostly consumer loans, and the credit card portfolio acquisition added $473 million (including commercial credit cards) to average balances in the third quarter. These increases were partially offset by the early termination of certain leveraged leases and other exit portfolio run-off.

Key originated approximately $9 billion in new or renewed lending commitments to consumers and businesses during the third quarter of 2012.

Average deposits totaled $62.7 billion for the third quarter of 2012, an increase of $3.8 billion compared to the year-ago quarter. The growth reflects an increase in business demand deposits and the impact of Key's branch acquisition. The growth in nontime deposits more than offset the maturities in certificates of deposit.

Compared to the second quarter of 2012, average deposits increased by $1.6 billion. The increase in average balances was attributable to Key's branch acquisition in the third quarter 2012, which added $1.6 billion of mostly nontime consumer deposits.

Key's provision for loan and lease losses was $109 million for the third quarter of 2012, compared to $21 million for the second quarter of 2012 and $10 million for the year-ago quarter. Key's allowance for loan and lease losses was $888 million, or 1.73% of total period-end loans at September 30, 2012, compared to 1.79% at June 30, 2012, and 2.35% at September 30, 2011.

Net loan charge-offs for the third quarter of 2012 totaled $109 million, or .86% of average loans, including $45 million (.35% of average loans) of incremental net loan charge-offs reported in accordance with updated regulatory guidance requiring loans discharged through Chapter 7 bankruptcy and not reaffirmed by the borrower to be charged off to the collateral's fair market value less selling costs and classified as nonaccrual regardless of their delinquency status. The current period net loan charge-offs compare to $77 million, or .63% for the second quarter of 2012, and $109 million, or .90% for the same period last year.

Key also established an allowance for loan and lease losses for the acquired credit card and branch loans above the discount related to these acquired portfolios in accordance with the applicable accounting guidance. The allowance for these loan and lease losses was approximately $29 million at September 30, 2012.

At September 30, 2012, Key's nonperforming loans totaled $653 million and represented 1.27% of period-end portfolio loans. Included in this total was $38 million or the net carrying amount of the secured loans reclassified as troubled-debt restructurings under the updated regulatory guidance discussed above. Nonperforming loans at June 30, 2012 and September 30, 2011 represented 1.32% and 1.64% of period-end loans, respectively. Nonperforming assets at September 30, 2012, totaled $718 million and represented 1.39% of portfolio loans and OREO and other nonperforming assets, compared to 1.51% at June 30, 2012, and 1.89% at September 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, 2012.

As shown in the preceding table, at September 30, 2012, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios stood at 11.4% and 12.2%, respectively. In addition, the tangible common equity ratio was 10.4% at September 30, 2012.

As previously reported and as authorized by Key's Board of Directors and pursuant to Key's 2012 capital plan submitted to the Federal Reserve and not objected to by the Federal Reserve, Key had authority to repurchase up to $344 million of its Common Shares for general repurchase and repurchases in connection with employee elections under its compensation and benefit programs.

During the third quarter of 2012, Key completed $82 million of Common Share repurchases. Following completion of these repurchases, Key has remaining authority to repurchase up to $177 million of its Common Shares for general repurchase and repurchases in connection with employee elections under its compensation and benefit programs. Key's existing repurchase program does not have an expiration date. Common Share repurchases under the current authorization are expected to be executed through the first quarter of 2013.

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. For more detailed financial information pertaining to each business segment, see the tables at the end of this release.

Key Community Bank Summary of Operations

• Five consecutive quarters of average loan growth
• Acquisition of 37 branches and credit card portfolio added $696 million to average loans during the third quarter
• Continued migration to lower-cost deposits
• Net loan charge-offs increased to 1.30% of average loans primarily due to the application of recently updated regulatory guidance related to debts discharged through Chapter 7 bankruptcy

Key Community Bank recorded a net loss attributable to Key of $23 million for the third quarter of 2012, compared to net income attributable to Key of $57 million for the year-ago quarter. The net loss for the third quarter of 2012 is attributable to additional provision expense for loan and lease losses related to the acquisitions completed and implementing the updated regulatory guidance on debts discharged through Chapter 7 bankruptcy.

Taxable-equivalent net interest income declined by $6 million, or 1.6% from the third quarter of 2011. Average loans and leases grew 8.1% while average deposits increased 3.9% from one year ago. The branch and credit card portfolio acquisitions contributed $26 million to net interest income, $696 million to average loans and leases, and $1.6 billion to deposits. Given the prolonged low-rate environment, the value derived from deposits was less in the current period compared to the same period one year ago.

Noninterest income increased by $17 million, or 8.8% from the year-ago quarter. Credit card fees and trust and investment services income each increased $6 million primarily due to the credit card portfolio and branch acquisitions. Miscellaneous income also increased $15 million primarily due to gains realized on the sale of certain tax credits. Net gains (losses) from loan sales were also $4 million higher. These increases in noninterest income were partially offset by a $15 million decline in electronic banking fees resulting from government pricing controls on debit transactions that went into effect October 1, 2011.

The provision for loan and lease losses increased by $81 million, or 207.7% compared to the third quarter of 2011. The application of recently updated regulatory guidance related to debts discharged through Chapter 7 bankruptcy increased the provision $45 million, and the acquisition of the credit card portfolio and the loans associated with the branch acquisition increased the provision $32 million. Net loan charge-offs were $93 million for the third quarter of 2012, up $33 million from the same period one year ago, primarily due to the application of recently updated regulatory guidance discussed above.

Noninterest expense increased by $55 million, or 12% from the year-ago quarter. Key's third quarter 2012 branch and credit card portfolio acquisitions contributed $26 million to the increase in noninterest expense spread across several expense categories. Personnel expense was $13 million higher than one year ago. Amortization of the intangible assets associated with the third quarter 2012 acquisitions of the previously discussed credit card portfolio and the branches and internally-allocated support costs each increased $8 million, and other miscellaneous expenses also increased $21 million from the same period one year ago.

Key Corporate Bank Summary of Operations

• Investment banking and debt placement fees were $82 million, up 18.8% from the second quarter
• Average loans up 11.2% from the prior year and 1.9% from the prior quarter
• Average deposits up 22.1% from the prior year and 3.7% from the prior quarter

Key Corporate Bank recorded net income attributable to Key of $118 million for the third quarter of 2012, compared to net income attributable to Key of $123 million for the same period one year ago.

Taxable-equivalent net interest income increased by $10 million, or 5.8% compared to the third quarter of 2011. Average earning assets increased $1.8 billion, or 9.7% from the year-ago quarter, resulting in an increase in earning asset spread of $4 million. Average deposit balances increased $2.3 billion, or 22.1% from one year ago, resulting in an increase in deposit spread of $6 million.

Noninterest income increased by $13 million, or 6.6% from the third quarter of 2011. Net gains (losses) from loan sales increased $20 million, and investment banking and capital markets income increased $16 million. These improvements in noninterest income were partially offset by a decrease in operating lease income of $8 million as that portfolio continues to run down. Trust and investment services income also declined $5 million, and other miscellaneous income items decreased $8 million compared to the year-ago quarter.

The provision for loan and lease losses in the third quarter of 2012 was a credit of $3 million compared to a credit of $40 million for the same period one year ago. The portfolio's asset quality continued to improve for the twelfth consecutive quarter. Net loan charge-offs in the third quarter of 2012 were $8 million compared to $22 million for the same period one year ago.

Noninterest expense decreased by $7 million, or 3.2% from the third quarter of 2011. The provision (credit) for losses on lending-related commitments was a credit of $6 million compared to a charge of $1 million one year ago. Also contributing to the decline in noninterest expense were decreases in operating lease expense of $7 million and various other miscellaneous expenses of $6 million. These decreases in noninterest expense were partially offset by an increase in personnel expense of $13 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 $102 million for the third quarter of 2012, compared to net income attributable to Key of $52 million for the same period last year. These results were primarily attributable to an increase in other income of $71 million due to a $54 million gain on the redemption of certain trust preferred securities and a $26 million net gain resulting from the early terminations of leveraged leases in the third quarter of 2012 (a $39 million gain on leased equipment less a $13 million charge for the write-off of capitalized loan origination costs). These results were partially offset by a decrease in net gains (losses) from principal investing of $23 million.

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Key traces its history back more than 160 years and is headquartered in Cleveland, Ohio. One of the nation's largest bank-based financial services companies, Key has assets of approximately $87.0 billion at September 30, 2012.

Key provides deposit, lending, cash management and investment services to individuals and small businesses through its 14-state branch network under the name KeyBank National Association. Key also provides a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications and derivatives to middle market companies in selected industries throughout the United States under the KeyBanc Capital Markets trade name.

For more information, visit https://www.key.com/. KeyBank is Member FDIC.

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 18, 2012. An audio replay of the call will be available through October 25, 2012.

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.

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GAAP to Non-GAAP Reconciliations
(dollars in millions)

The table below presents certain non-GAAP financial measures related to "tangible common equity," "return on tangible common equity," "Tier 1 common equity," "pre-provision net revenue," and "cash efficiency ratio."

The tangible common equity ratio and the return on tangible common equity ratio have been a focus for some investors, and management believes these ratios may assist investors in analyzing Key's capital position without regard to the effects of intangible assets and preferred stock. Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. Since the commencement of the Comprehensive Capital Analysis and Review process in early 2009, the Federal Reserve has focused its assessment of capital adequacy on a component of Tier 1 risk-based capital known as Tier 1 common equity, a non-GAAP financial measure. Because the Federal Reserve has long indicated that voting common shareholders' equity (essentially Tier 1 risk-based capital less preferred stock, qualifying capital securities and noncontrolling interests in subsidiaries) generally should be the dominant element in Tier 1 risk-based capital, this focus on Tier 1 common equity is consistent with existing capital adequacy categories.

Tier 1 common equity is neither formally defined by GAAP nor prescribed in amount by federal banking regulations; this measure is considered to be a non-GAAP financial measure. Since analysts and banking regulators may assess Key's capital adequacy using tangible common equity and Tier 1 common equity, management believes it is useful to enable investors to assess Key's capital adequacy on these same bases. The table also reconciles the GAAP performance measures to the corresponding non-GAAP measures.

The table also shows the computation for pre-provision net revenue, which is not formally defined by GAAP. Management believes that eliminating the effects of the provision for loan and lease losses makes it easier to analyze the results by presenting them on a more comparable basis.

The cash efficiency ratio performance measure removes the impact of Key's intangible asset amortization from the calculation. Management believes this ratio provides greater consistency and comparability between Key's results and those of its peer banks. Additionally, this ratio is used by analysts and investors to assist in the development of their earnings forecasts and peer bank analysis.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

SOURCE KeyCorp