KeyCorp Reports First Quarter 2011 Net Income of $184 Million

CLEVELAND, April 18, 2011 /PRNewswire/ --

• Net income from continuing operations of $184 million, or $.21 per common share, for the first quarter of 2011
• Net interest margin at 3.25% for the first quarter of 2011
• Nonperforming loans declined $183 million to 1.82% of period-end loans
• Nonperforming assets declined $249 million
• Loan loss reserve at 2.83% of total period-end loans
• Net charge-offs declined to $193 million, or 1.59% of average loan balances, for the first quarter of 2011
• Repurchased $2.5 billion of preferred stock related to participation in TARP
• Tier 1 common equity and Tier 1 risk-based capital ratios estimated at 10.70% and 13.44%, respectively, at March 31, 2011

KeyCorp (NYSE: KEY) today announced first quarter net income from continuing operations attributable to Key common shareholders of $184 million, or $.21 per common share.  These results were after the accelerated amortization of the discount on the repurchased preferred shares from the U.S. Treasury ("deemed dividend") of $49 million, or $.06 per diluted common share, during the first quarter.  Key's first quarter 2011 results compare to a net loss from continuing operations attributable to Key common shareholders of $98 million, or $.11 per common share, for the first quarter of 2010.  The first quarter 2011 results reflect an improvement in noninterest expense and lower credit costs from the same period one-year ago.  First quarter 2011 net income attributable to Key common shareholders was $173 million compared to a net loss attributable to Key common shareholders of $96 million for the same quarter one year ago.

During the first quarter of 2011, the Company continued to benefit from improved asset quality in both Key Community Bank and Key Corporate Bank.  Nonperforming assets declined $1.3 billion, and nonperforming loans decreased by $1.2 billion from the year-ago quarter to $1.1 billion and $885 million, respectively.  Net charge-offs declined $329 million from the first quarter of 2010 to $193 million, or 1.59%, of average loan balances for the first quarter of 2011.

"Our first quarter results demonstrate continued improvement in asset quality and disciplined expense control, and underscore our successful emergence from the recession," said Chairman and Chief Executive Officer Henry L. Meyer III.  "Coupled with our successful capital actions during the quarter and TARP repayment, Key emerges in an excellent position to compete and grow under the leadership of CEO-elect Beth Mooney and her team."

Meyer added:  "Our aggressive actions to exit riskier lending categories, which began over four years ago, have led to significant credit quality improvement again this quarter, placing our credit statistics at or near the top of our peer group.  In addition, our concerted efforts to improve Key's efficiency and effectiveness under Keyvolution have resulted in approximately $317 million in annualized cost savings through the first quarter of 2011."

"Key is well positioned for a range of opportunities based on our strong capital, balance sheet and liquidity," said Mooney, who will become KeyCorp Chairman and CEO effective May 1. "We expect to continue to see decreasing levels of net charge-offs and nonperforming assets during 2011.  Strong capital provides us the flexibility to make investments in our relationship businesses, look for opportunities to build market share in target markets, and meet our clients' needs for credit and financial services as demand increases with an improving economy."  

The Company expects to build 40 new branches in 2011, having opened eight new branches in the first quarter of 2011 and 77 others in the prior two calendar years.  The Company continues its multi-year branch building and renovation project which has resulted in approximately one-third of Key's 1,040 branches in its 14 state-branch network either being newly constructed or remodeled over the past four years.  In addition, Key originated approximately $6.9 billion in new or renewed lending commitments to consumers and businesses during the first quarter, which is up from $5.3 billion from the same period one year ago.  

At March 31, 2011, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios were 10.70% and 13.44%, compared to 9.34% and 15.16%, respectively, at December 31, 2010.  During the first quarter of 2011, Key completed the repurchase of 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 of the Troubled Asset Relief Program ("TARP").  The transaction followed Key's successful completion of a $625 million common equity offering and a $1 billion debt offering.  The Board of Directors is expected to consider a dividend increase in the second quarter.    

As a result of the repurchase of the U.S. Treasury's preferred stock investment in Key, the Company recorded a $49 million one-time deemed dividend related to the remaining difference between the repurchase price and the carrying value of the preferred shares at the time of repurchase.  Beginning with the second quarter of 2011, the repurchase will result in the elimination of $31 million in dividends and $4 million of discount amortization, or $140 million on an annual basis, related to these preferred shares.  The only remaining item related to TARP is the potential repurchase of the warrant granted to the U.S. Treasury for the purchase of 35,244,361 shares of Key common stock at a purchase price of $10.64 per share (the "Warrant").  Key has notified the U.S. Treasury of its intent to repurchase the Warrant.  

The following table shows Key's continuing and discontinued operating results for the three-month periods ended March 31, 2011, December 31, 2010 and March 31, 2010.

SUMMARY OF CONTINUING OPERATIONS

Taxable-equivalent net interest income was $604 million for the first quarter of 2011, and the net interest margin was 3.25%.  These results compare to taxable-equivalent net interest income of $632 million and a net interest margin of 3.19% for the first quarter of 2010.  The increase in the net interest margin primarily reflects the Company's efforts to lower funding costs by reducing the level of higher costing certificates of deposit and growing lower costing transaction accounts. This benefit to the net interest margin was offset by a lower level of average earning assets and a change in asset mix as loans paid down.

Compared to the fourth quarter of 2010, taxable-equivalent net interest income decreased by $31 million, and the net interest margin declined six basis points.  The decline in the net interest margin and net interest income reflects the combined effect of hedge maturities and the change in the mix and lower levels of earning assets as average loan balances declined.

Key's noninterest income was $457 million for the first quarter of 2011, compared to $450 million for the year-ago quarter.  Investment banking and capital markets income increased $34 million compared to the same period one-year ago.  A $10 million increase in investment banking income and a reduction in the customer derivative reserve in the first quarter of 2011 compared to an increase in this reserve one year ago contributed to this improvement.  In addition, letter of credit and loan fees and net gains (losses) from loan sales both increased $15 million from the first quarter of 2010.  These increases were partially offset by declines in other income of $22 million and operating lease income of $12 million.  Also, service charges on deposit accounts decreased $8 million compared to the same period one-year ago as a result of the changes associated with implementing Regulation E in the third quarter of 2010.  

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

Compared to the fourth quarter of 2010, noninterest income decreased by $69 million.  The decline was a result of lower investment banking and capital markets income of $20 million, corporate-owned life insurance income of $15 million, net securities gains (losses) of $13 million, and net gains (losses) from loan sales of $10 million.  In addition, the Company realized a gain of $28 million from the sale of Tuition Management Systems in the fourth quarter of 2010.   These decreases were partially offset by an increase of $41 million in net gains (losses) from principal investing (including results attributable to noncontrolling interests).

Key's noninterest expense was $701 million for the first quarter of 2011, compared to $785 million for the same period last year.  Contributing to the decrease in noninterest expense were declines of $22 million in other real estate owned ("OREO") expense, $11 million in operating lease expense, and $8 million in FDIC deposit insurance premiums.  Key also experienced a decline of $43 million in various miscellaneous expenses.  

Compared to the fourth quarter of 2010, noninterest expense decreased by $43 million.  Decreases in noninterest expense included $18 million in business services and professional fees, $12 million in marketing costs, and $35 million in various miscellaneous expenses.  These decreases were partially offset by Key's provision (credit) for losses on lending-related commitments which declined from a credit of $26 million in the fourth quarter of 2010 to a credit of $4 million in the current quarter.

ASSET QUALITY

Key's provision for loan and lease losses was a credit of $40 million for the first quarter of 2011, compared to a charge of $413 million for the year-ago quarter and a credit of $97 million for the fourth quarter of 2010.  Key's allowance for loan and lease losses was $1.4 billion, or 2.83% of total period-end loans, at March 31, 2011, compared to 3.20% at December 31, 2010, and 4.34% at March 31, 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 $193 million, or 1.59%, of average loans.  These results compare to $522 million, or 3.67%, for the same period last year and $256 million, or 2.00%, for the previous quarter.  Net loan charge-offs have declined for the last five consecutive quarters.

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 fourth quarter of 2010, net loan charge-offs in the commercial loan portfolio decreased by $56 million.  The decrease was primarily attributable to a decline in the commercial, financial and agricultural and the real estate – commercial mortgage loan portfolios.  As shown in the table on page 6, Key's exit loan portfolio accounted for $41 million, or 21.24%, of Key's total net loan charge-offs for the first quarter of 2011.  Net charge-offs in the exit loan portfolio decreased by $40 million from the fourth quarter of 2010, primarily driven by an improvement in the commercial loan portfolio.

At March 31, 2011, Key's nonperforming loans totaled $885 million and represented 1.82% of period-end portfolio loans, compared to 2.13% at December 31, 2010, and 3.69% at March 31, 2010.  Nonperforming assets at March 31, 2011, totaled $1.1 billion and represented 2.23% of portfolio loans and OREO and other nonperforming assets, compared to 2.66% at December 31, 2010, and 4.31% at March 31, 2010.  The following table illustrates the trend in Key's nonperforming assets by loan type over the past five quarters.