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KeyCorp Reports First Quarter 2011 Net Income of $184 Million


News provided by

KeyCorp

18 Apr, 2011, 06:30 ET

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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.


Results of Operations






















Three months ended

in millions, except per share amounts


3-31-11



12-31-10



3-31-10

Summary of operations









Income (loss) from continuing operations attributable to Key

$

274


$

333


$

(57)

Income (loss) from discontinued operations, net of taxes (a)


(11)



(13)



2

Net income (loss) attributable to Key

$

263


$

320


$

(55)











Income (loss) from continuing operations attributable to Key    

$

274


$

333


$

(57)

Less:

Dividends on Series A Preferred Stock    


6



6



6


Cash dividends on Series B Preferred Stock  


31



31



31


Amortization of discount on Series B Preferred Stock  (b)


53



4



4

Income (loss) from continuing operations attributable to Key common shareholders    


184



292



(98)

Income (loss) from discontinued operations, net of taxes  (a)


(11)



(13)



2

Net income (loss) attributable to Key common shareholders    

$

173


$

279


$

(96)











Per common share — assuming dilution









Income (loss) from continuing operations attributable to Key common shareholders

$

.21


$

.33


$

(.11)

Income (loss) from discontinued operations, net of taxes  (a)


(.01)



(.02)



—

Net income (loss) attributable to Key common shareholders  (c)

$

.19


$

.32


$

(.11)












(a) In September 2009, management made the decision to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank National Association.  In April 2009, management made the decision to curtail the operations of Austin Capital Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments for its institutional customer base.  As a result of these decisions, Key has accounted for these businesses as discontinued operations.  The loss from discontinued operations for the three-month period ended March 31, 2011, was primarily attributable to fair value adjustments related to the education lending securitization trusts.


(b) 3-31-11 includes a $49 million deemed dividend.



(c) Earnings per share may not foot due to rounding.

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.


Noninterest Income – Major Components




























in millions


1Q11



4Q10



3Q10



2Q10



1Q10

Trust and investment services income

$

110


$

108


$

110


$

112


$

114

Service charges on deposit accounts


68



70



75



80



76

Operating lease income


35



42



41



43



47

Letter of credit and loan fees


55



51



61



42



40

Corporate-owned life insurance income


27



42



39



28



28

Electronic banking fees


30



31



30



29



27

Insurance income


15



12



15



19



18

Net gains (losses) from loan sales


19



29



18



25



4

Net gains (losses) from principal investing


35



(6)



18



17



37

Investment banking and capital markets income (loss)


43



63



42



31



9

















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.


Selected Asset Quality Statistics from Continuing Operations





















dollars in millions


1Q11




4Q10




3Q10




2Q10




1Q10


Net loan charge-offs

$

193



$

256



$

357



$

435



$

522


Net loan charge-offs to average loans


1.59

%



2.00

%



2.69

%



3.18

%



3.67

%

Allowance for loan and lease losses

$

1,372



$

1,604



$

1,957



$

2,219



$

2,425


Allowance for credit losses (a)


1,441




1,677




2,056




2,328




2,544


Allowance for loan and lease losses to period-end loans


2.83

%



3.20

%



3.81

%



4.16

%



4.34

%

Allowance for credit losses to period-end loans


2.97




3.35




4.00




4.36




4.55


Allowance for loan and lease losses to nonperforming loans


155.03




150.19




142.64




130.30




117.43


Allowance for credit losses to nonperforming loans  


162.82




157.02




149.85




136.70




123.20


Nonperforming loans at period end

$

885



$

1,068



$

1,372



$

1,703



$

2,065


Nonperforming assets at period end


1,089




1,338




1,801




2,086




2,428


Nonperforming loans to period-end portfolio loans


1.82

%



2.13

%



2.67

%



3.19

%



3.69

%

Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets


2.23




2.66




3.48




3.88




4.31























(a) Includes the allowance for loan losses plus the liability for credit losses on lending-related commitments.

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.


Net Loan Charge-offs from Continuing Operations

















dollars in millions


1Q11



4Q10



3Q10



2Q10



1Q10


Commercial, financial and agricultural

$

32


$

80


$

136


$

136


$

126


Real estate — commercial mortgage


43



52



46



126



106


Real estate — construction


30



28



76



75



157


Commercial lease financing  


11



12



16



14



21


    Total commercial loans  


116



172



274



351



410


Home equity — Key Community Bank


24



26



35



25



30


Home equity — Other  


14



13



13



16



17


Marine


19



17



12



19



38


Other


20



28



23



24



27


    Total consumer loans


77



84



83



84



112


    Total net loan charge-offs

$

193


$

256


$

357


$

435


$

522


















Net loan charge-offs to average loans from continuing operations


1.59

%


2.00

%


2.69

%


3.18

%


3.67

%

















Net loan charge-offs from discontinued operations — education lending business

$

35


$

32


$

22


$

31


$

36



















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.


Nonperforming Assets from Continuing Operations

















dollars in millions


1Q11



4Q10



3Q10



2Q10



1Q10


Commercial, financial and agricultural

$

221


$

242


$

335


$

489


$

558


Real estate — commercial mortgage


245



255



362



404



579


Real estate — construction


146



241



333



473



607


Commercial lease financing


42



64



84



83



99


Total consumer loans


231



266



258



254



222


     Total nonperforming loans


885



1,068



1,372



1,703



2,065


Nonperforming loans held for sale


86



106



230



221



195


OREO and other nonperforming assets


118



164



199



162



168


     Total nonperforming assets

$

1,089


$

1,338


$

1,801


$

2,086


$

2,428


















Restructured loans — accruing and nonaccruing (a)

$

242


$

297


$

360


$

343


$

323


Restructured loans included in nonperforming loans (a)


136



202



228



213



226


Nonperforming assets from discontinued operations —  education lending business


22



40



38



40



43


Nonperforming loans to period-end portfolio loans


1.82

%


2.13

%


2.67

%


3.19

%


3.69

%

Nonperforming assets to period-end portfolio loans,   plus OREO and other nonperforming assets


2.23



2.66



3.48



3.88



4.31



















(a) Restructured loans (i.e. troubled debt restructurings) are those for which Key, for reasons related to a borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider.  These concessions are made to improve the collectability of the loan and generally take the form of a reduction of the interest rate, extension of the maturity date or reduction in the principal balance.  

Nonperforming assets continued to decrease during the first quarter of 2011, representing the sixth consecutive quarterly decline.  Each of the categories within nonperforming assets experienced reductions in the first quarter.  As shown in the following table, Key's exit loan portfolio accounted for $145 million, or 13.31%, of Key's total nonperforming assets at March 31, 2011, compared to $210 million, or 15.70%, at December 31, 2010.

The following table shows the composition of Key's exit loan portfolio at March 31, 2011, and December 31, 2010, the net charge-offs recorded on this portfolio for the first quarter of 2011 and fourth quarter of 2010, and the nonperforming status of these loans at March 31, 2011, and December 31, 2010.


Exit Loan Portfolio from Continuing Operations



























Balance


Change


Net Loan


Balance on




Outstanding


3-31-11 vs.


Charge-offs


Nonperforming Status



in millions

3-31-11


12-31-10


12-31-10


1Q11


4Q10


3-31-11


12-31-10



Residential properties — homebuilder

$

87


$

113


$

(26)


$

2


$

16


$

44


$

66



Marine and RV floor plan


150



166



(16)



3



12



35



37



Commercial lease financing (a)


1,922



2,047



(125)



2



20



21



46



    Total commercial loans


2,159



2,326



(167)



7



48



100



149



Home equity — Other


627



666



(39)



14



13



13



18



Marine


2,112



2,234



(122)



19



17



31



42



RV and other consumer


150



162



(12)



1



3



1



1



    Total consumer loans


2,889



3,062



(173)



34



33



45



61



    Total exit loans in loan portfolio

$

5,048


$

5,388


$

(340)


$

41


$

81


$

145


$

210


























Discontinued operations — education lending business (not included in exit loans above) (b)

$

6,318


$

6,466


$

(148)


$

35


$

32


$

22


$

39


























(a) Includes the business aviation, commercial vehicle, office products, construction and industrial leases, and Canadian lease financing portfolios; and all remaining balances related to lease in, lease out; sale in, sale out; service contract leases; and qualified technological equipment leases.



(b) Includes loans in Key's consolidated education loan securitization trusts.

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at March 31, 2011.


Capital Ratios

































3-31-11



12-31-10



9-30-10



6-30-10



3-31-10



Tier 1 common equity (a), (b)

10.70

%


9.34

%


8.61

%


8.07

%


7.51

%


Tier 1 risk-based capital (a)

13.44



15.16



14.30



13.62



12.92



Total risk-based capital (a)

17.35



19.12



18.22



17.80



17.07



Tangible common equity to tangible assets (b)

9.16



8.19



8.00



7.65



7.37



















(a) 3-31-11 ratio is estimated.


(b) The table entitled "GAAP to Non-GAAP Reconciliations" presents the computations of certain financial measures related to "tangible common equity" and "Tier 1 common equity."  The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.

As shown in the preceding table, at March 31, 2011, Key's estimated Tier 1 common equity ratio stood at 10.70%, placing it in the top quartile of its peer group for this ratio.  In addition, Key's estimated Tier 1 risk-based capital ratio stood at 13.44%, and its tangible common equity ratio was 9.16% at March 31, 2011.  Since March 31, 2010, Key's Tier 1 common equity ratio has increased 319 basis points as a result of four consecutive quarters of profitability, a lower level of risk-weighted assets, and the March 2011 $625 million common equity raise.

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


Summary of Changes in Common Shares Outstanding











in thousands

1Q11


4Q10


3Q10


2Q10


1Q10

Shares outstanding at beginning of period

880,608


880,328


880,515


879,052


878,535

Common shares issued

70,621


—


—


—


—

Shares reissued (returned) under employee benefit plans

2,697


280


(187)


1,463


517

Shares outstanding at end of period

953,926


880,608


880,328


880,515


879,052












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.  The transaction followed Key's successful completion of 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 preferred shares.

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.  


Major Business Segments



























Percent change 1Q11 vs.


dollars in millions


1Q11



4Q10



1Q10



4Q10



1Q10


Revenue from continuing operations (TE)
















Key Community Bank

$

565


$

597


$

594



(5.4)

%


(4.9)

%

Key Corporate Bank


403



434



372



(7.1)



8.3


Other Segments


96



112



104



(14.3)



(7.7)


    Total Segments


1,064



1,143



1,070



(6.9)



(.6)


Reconciling Items


(3)



18



12



(116.7)



(125.0)


    Total  

$

1,061


$

1,161


$

1,082



(8.6)

%


(1.9)

%

















Income (loss) from continuing operations attributable to Key  
















Key Community Bank

$

81


$

58


$

13



39.7

%


523.1

%

Key Corporate Bank


125



289



(36)



(56.7)



N/M


Other Segments


58



3



(49)



N/M



N/M


    Total Segments


264



350



(72)



(24.6)



N/M


Reconciling Items


10



(17)



15



N/M



(33.3)

%

    Total  

$

274


$

333


$

(57)



(17.7)

%


N/M



















TE = Taxable Equivalent, N/M = Not Meaningful


Key Community Bank



























Percent change 1Q11 vs.


dollars in millions


1Q11



4Q10



1Q10



4Q10



1Q10


Summary of operations
















    Net interest income (TE)

$

378


$

394


$

412



(4.1)

%


(8.3)

%

    Noninterest income


187



203



182



(7.9)



2.7


    Total revenue (TE)


565



597



594



(5.4)



(4.9)


    Provision (credit) for loan and lease losses


11



74



142



(85.1)



(92.3)


    Noninterest expense


445



456



451



(2.4)



(1.3)


    Income (loss) before income taxes (TE)


109



67



1



62.7



N/M


    Allocated income taxes and TE adjustments


28



9



(12)



211.1



N/M


    Net income (loss) attributable to Key

$

81


$

58


$

13



39.7

%


523.1

%

















Average balances
















    Loans and leases

$

26,312


$

26,436


$

27,769



(.5)

%


(5.2)

%

    Total assets


29,739



29,830



30,886



(.3)



(3.7)


    Deposits


48,108



48,124



51,444



—



(6.5)


















Assets under management at period end

$

20,057


$

18,788


$

18,248



6.8

%


9.9

%

































TE = Taxable Equivalent, N/M = Not Meaningful



Additional Key Community Bank Data










Percent change 1Q11 vs.


dollars in millions


1Q11



4Q10



1Q10



4Q10



1Q10


Average deposits outstanding
















NOW and money market deposit accounts

$

21,482 


$

20,513 


$

18,651 



4.7 

%


15.2 

%

Savings deposits


1,901 



1,863 



1,814 



2.0 



4.8 


Certificates of deposit ($100,000 or more)


4,513 



4,885 



7,362 



(7.6)



(38.7)


Other time deposits


7,959 



8,638 



12,558 



(7.9)



(36.6)


Deposits in foreign office


398 



421 



502 



(5.5)



(20.7)


Noninterest-bearing deposits


11,855 



11,804 



10,557 



.4 

%


12.3 


   Total deposits

$

48,108 


$

48,124 


$

51,444 



— 



(6.5)

%

















Home equity loans
















Average balance

$

9,454 


$

9,582 


$

9,967 








Weighted-average loan-to-value ratio (at date of origination)


70 

%


70 

%


70 

%







Percent first lien positions


53 



53 



53 








Other data
















Branches


1,040 



1,033 



1,014 








Automated teller machines


1,547 



1,531 



1,501 









Key Community Bank Summary of Operations

Key Community Bank recorded net income attributable to Key of $81 million for the first quarter of 2011, compared to net income attributable to Key of $13 million for the year-ago quarter.  A substantial decrease in the provision for loan and lease losses drove the improvement in the first quarter of 2011.

Taxable-equivalent net interest income declined by $34 million, or 8%, from the first quarter of 2010, due to declines in average earning assets and average deposits.  Average earning assets decreased by $1 billion, or 5%, from the year-ago quarter, reflecting reductions in the commercial loan and home equity loan portfolios.  Average deposits declined by $3 billion, or 6%, as higher-costing certificates of deposit mature, partially offset by growth in noninterest-bearing deposits and NOW and money market deposit accounts.

Noninterest income increased by $5 million, or 3%, from the year-ago quarter, due to higher income from net gains from loan sales, electronic banking fees, trust and investment services, and a reduction in the provision for credit losses from client derivatives.  These factors were partially offset by lower service charges on deposits from the implementation of Regulation E.

The provision for loan and lease losses declined by $131 million, or 92%, compared to the first quarter of 2010 due to improving economic conditions resulting in lower net charge-offs and nonperforming loans from the same period one year ago.

Noninterest expense declined by $6 million, or 1%, from the year-ago quarter.   The decrease was driven by reductions in FDIC deposit insurance premiums and corporate allocated costs. These improvements were partially offset by increases in personnel expense and business services and professional fees, reflecting the cost of our third-party mortgage operations.  


Key Corporate Bank



























Percent change 1Q11 vs.


dollars in millions


1Q11



4Q10



1Q10



4Q10



1Q10


Summary of operations
















    Net interest income (TE)

$

185


$

204


$

195



(9.3)

%


(5.1)

%

    Noninterest income


218



230



177



(5.2)



23.2


    Total revenue (TE)


403



434



372



(7.1)



8.3


    Provision (credit) for loan and lease losses


(21)



(263)



161



N/M



(113.0)


    Noninterest expense


228



240



272



(5.0)



(16.2)

%

    Income (loss) before income taxes (TE)


196



457



(61)



(57.1)



N/M


    Allocated income taxes and TE adjustments


72



168



(24)



(57.1)



N/M


    Net income (loss)  


124



289



(37)



(57.1)



N/M


       Less: Net income (loss) attributable to noncontrolling interests


(1)



—



(1)



N/M



—


    Net income (loss) attributable to Key

$

125


$

289


$

(36)



(56.7)

%


N/M


















Average balances
















    Loans and leases  

$

17,677


$

18,602


$

22,440



(5.0)

%


(21.2)

%

    Loans held for sale  


275



253



240



8.7



14.6


    Total assets


21,747



22,607



26,270



(3.8)



(17.2)


    Deposits


11,282



12,766



12,220



(11.6)



(7.7)


















Assets under management at period end

$

41,461


$

41,027


$

47,938



1.1

%


(13.5)

%


TE = Taxable Equivalent, N/M = Not Meaningful

Key Corporate Bank Summary of Operations

Key Corporate Bank recorded net income attributable to Key of $125 million for the first quarter of 2011, compared to a net loss attributable to Key of $36 million for the same period one year ago.  This improvement in the first quarter of 2011 was a result of a substantial decrease in the provision for loan and lease losses.  

Taxable-equivalent net interest income decreased by $10 million, or 5%, compared to the first quarter of 2010, primarily due to lower earning assets and deposits.  Average earning assets decreased by $5 billion, or 21% from the year-ago quarter.  Average deposits declined by $938 million, or 8%, from one year ago.  During the first quarter of 2011, approximately $1.5 billion of escrow deposits associated with Key's mortgage servicing operations were moved to another financial institution as a result of the previously reported ratings downgrade of KeyBank National Association by Moody's in November 2010.  

Noninterest income increased by $41 million, or 23%, from the first quarter of 2010.  Investment banking and capital markets income increased $39 million.  The first quarter of 2010 included a $21 million provision for losses on customer derivatives compared to a credit of $9 million in the first quarter of 2011.  This improvement was partially offset by lower levels of fixed income and equity trading income.  Investment banking income increased primarily due to increased levels of debt and equity financings.  Also contributing to the improvement in noninterest income was a $16 million increase in letter of credit and loan fees related to an increase in syndication fees.  These gains were partially offset by decreases in trust and investment services income of $7 million and operating lease revenue of $5 million.

The provision for loan and lease losses in the first quarter of 2011 was a credit of $21 million compared to a charge of $161 million for the same period one year ago.  Key Corporate Bank continued to experience improved asset quality for the sixth quarter in a row.

Noninterest expense decreased by $44 million, or 16%, from the first quarter of 2010 due in part to a $24 million decline in OREO expense.  Also contributing to the improvement was a $34 million decrease in various miscellaneous expenses and a $5 million decline in corporate overhead.   These improvements were partially offset by an increase in personnel expense.

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 $58 million for the first quarter of 2011, compared to a net loss attributable to Key of $49 million for the same period last year.  These results are primarily attributable to a decrease in the provision for loan and lease losses and noninterest expense.  

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 $90 billion at March 31, 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, scoring 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 Monday, April 18, 2011.  An audio replay of the call will be available through April 25, 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, which has been filed with the Securities and Exchange Commission and is 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.

*****


Financial Highlights

(dollars in millions, except per share amounts)


















Three months ended





3-31-11



12-31-10



3-31-10


Summary of operations













Net interest income (TE)

$

604



$

635



$

632



Noninterest income


457




526




450




Total revenue (TE)


1,061




1,161




1,082



Provision (credit) for loan and lease losses


(40)




(97)




413



Noninterest expense


701




744




785



Income (loss) from continuing operations attributable to Key


274




333




(57)



Income (loss) from discontinued operations, net of taxes (b)


(11)




(13)




2



Net income (loss) attributable to Key  


263




320




(55)

















Income (loss) from continuing operations attributable to Key common shareholders

$

184



$

292



$

(98)



Income (loss) from discontinued operations, net of taxes (b)


(11)




(13)




2



Net income (loss) attributable to Key common shareholders


173




279




(96)
















Per common share













Income (loss) from continuing operations attributable to Key common shareholders

$

.21



$

.33



$

(.11)



Income (loss) from discontinued operations, net of taxes (b)


(.01)




(.02)




—



Net income (loss) attributable to Key common shareholders


.20




.32




(.11)

















Income (loss) from continuing operations attributable to Key common shareholders — assuming dilution  


.21




.33




(.11)



Income (loss) from discontinued operations, net of taxes — assuming dilution (b)


(.01)




(.02)




—



Net income (loss) attributable to Key common shareholders — assuming dilution  


.19




.32




(.11)

















Cash dividends paid


.01




.01




.01



Book value at period end


9.58




9.52




9.01



Tangible book value at period end


8.59




8.45




7.91



Market price at period end


8.88




8.85




7.75
















Performance ratios













From continuing operations:













Return on average total assets


1.32 

%



1.53 

%



(.26)

%


Return on average common equity


8.75




13.71




(4.95)



Net interest margin (TE)


3.25




3.31




3.19

















From consolidated operations:













Return on average total assets


1.18 

%



1.36 

%



(.23)

%


Return on average common equity


8.23




13.10




(4.85)



Net interest margin (TE)


3.16




3.22




3.13



Loan to deposit (d)


90.76




90.30




93.23
















Capital ratios at period end













Key shareholders' equity to assets  


10.42 

%



12.10 

%



11.17 

%


Tangible Key shareholders' equity to tangible assets


9.48




11.20




10.26



Tangible common equity to tangible assets (a)


9.16




8.19




7.37



Tier 1 common equity (a), (c)


10.70




9.34




7.51



Tier 1 risk-based capital (c)


13.44




15.16




12.92



Total risk-based capital (c)


17.35




19.12




17.07



Leverage (c)


11.47




13.02




11.60
















Asset quality — from continuing operations













Net loan charge-offs

$

193



$

256



$

522



Net loan charge-offs to average loans  


1.59 

%



2.00 

%



3.67 

%


Allowance for loan and lease losses

$

1,372



$

1,604



$

2,425



Allowance for credit losses


1,441




1,677




2,544



Allowance for loan and lease losses to period-end loans


2.83 

%



3.20 

%



4.34 

%


Allowance for credit losses to period-end loans


2.97




3.35




4.55



Allowance for loan and lease losses to nonperforming loans


155.03




150.19




117.43



Allowance for credit losses to nonperforming loans  


162.82




157.02




123.20



Nonperforming loans at period end

$

885



$

1,068



$

2,065



Nonperforming assets at period end


1,089




1,338




2,428



Nonperforming loans to period-end portfolio loans


1.82 

%



2.13 

%



3.69 

%


Nonperforming assets to period-end portfolio loans plus OREO and other nonperforming assets


2.23




2.66




4.31
















Trust and brokerage assets













Assets under management

$

61,518



$

59,815



$

66,186



Nonmanaged and brokerage assets  


29,024




28,069




27,809
















Other data













Average full-time equivalent employees


15,301




15,424




15,772



Branches


1,040




1,033




1,014
















Taxable-equivalent adjustment

$

7



$

6



$

7



(a) The following table entitled "GAAP to Non-GAAP Reconciliations" presents the computations of certain financial measures related to "tangible common equity" and "Tier 1 common equity."  The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.


(b) In September 2009, management made the decision to discontinue the education lending business conducted through Key Education Resources, the education payment and financing unit of KeyBank National Association.  In April 2009, management made the decision to curtail the operations of Austin Capital Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments for its institutional customer base.  As a result of these decisions, Key has accounted for these businesses as discontinued operations.


(c) 3-31-11 ratio is estimated.


(d) Represents period-end consolidated total loans and loans held for sale (excluding education loans in the securitization trusts) divided by period-end consolidated total deposits (excluding deposits in foreign office).


TE = Taxable Equivalent, GAAP = U.S. generally accepted accounting principles  

GAAP to Non-GAAP Reconciliations

(dollars in millions, except per share amounts)

The table below presents the computations of certain financial measures related to "tangible common equity," "Tier 1 common equity" and "pre-provision net revenue."  The tangible common equity ratio has become a focus of some investors, and management believes that this ratio may assist investors in analyzing Key's capital position absent 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 composition of capital, the calculation of which is prescribed in federal banking regulations.  As a result of the Supervisory Capital Assessment Program, the Federal Reserve has focused its assessment of capital adequacy on a component of Tier 1 capital, known as Tier 1 common equity.  Because the Federal Reserve has long indicated that voting common shareholders' equity (essentially Tier 1 capital less preferred stock, qualifying capital securities and noncontrolling interests in subsidiaries) generally should be the dominant element in Tier 1 capital, such a focus is consistent with existing capital adequacy guidelines and does not imply a new or ongoing capital standard.  Because 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 provide investors the ability 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 provision for loan and lease losses facilitates the analysis of results by presenting them on a more comparable basis.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited.  To mitigate these limitations, Key has procedures in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components, and to ensure that Key's performance is properly reflected to facilitate period-to-period comparisons.  Although these non-GAAP financial measures are frequently used by investors in the evaluation of 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.





Three months ended





3-31-11



12-31-10



3-31-10


Tangible common equity to tangible assets at period end













Key shareholders' equity (GAAP)

$

9,425



$

11,117



$

10,641



Less:

Intangible assets  


937




938




963




Preferred Stock, Series B  


—




2,446




2,434




Preferred Stock, Series A  


291




291




291




Tangible common equity (non-GAAP)  

$

8,197



$

7,442



$

6,953

















Total assets (GAAP)

$

90,438



$

91,843



$

95,303



Less:

Intangible assets  


937




938




963




Tangible assets (non-GAAP)

$

89,501



$

90,905



$

94,340

















Tangible common equity to tangible assets ratio (non-GAAP)


9.16 

%



8.19 

%



7.37 

%















Tier 1 common equity at period end













Key shareholders' equity (GAAP)  

$

9,425



$

11,117



$

10,641



Qualifying capital securities  


1,791




1,791




1,791



Less:

Goodwill  


917




917




917




Accumulated other comprehensive income (loss) (a)


(92)




(66)




(25)




Other assets (b)


191




248




765




Total Tier 1 capital (regulatory)


10,200




11,809




10,775



Less:

Qualifying capital securities  


1,791




1,791




1,791




Preferred Stock, Series B  


—




2,446




2,434




Preferred Stock, Series A  


291




291




291




Total Tier 1 common equity (non-GAAP)  

$

8,118



$

7,281



$

6,259

















Net risk-weighted assets (regulatory) (b), (c)

$

75,878



$

77,921



$

83,362

















Tier 1 common equity ratio (non-GAAP) (c)


10.70 

%



9.34 

%



7.51 

%















Pre-provision net revenue













Net interest income (GAAP)

$

597



$

629



$

625



Plus:

Taxable-equivalent adjustment


7




6




7




Noninterest income


457




526




450



Less:

Noninterest expense


701




744




785



Pre-provision net revenue from continuing operations (non-GAAP)

$

360



$

417



$

297



(a) Includes net unrealized gains or losses on securities available for sale (except for net unrealized losses on marketable equity securities), net gains or losses on cash flow hedges, and amounts resulting from the December 31, 2006, adoption and subsequent application of the applicable accounting guidance for defined benefit and other postretirement plans.  


(b) Other assets deducted from Tier 1 capital and net risk-weighted assets consist of disallowed deferred tax assets of $102 million at March 31, 2011, $158 million at December 31, 2010 and $651 million at March 31, 2010, disallowed intangible assets (excluding goodwill) and deductible portions of nonfinancial equity investments.  


(c) 3-31-11 amount is estimated.


GAAP = U.S. generally accepted accounting principles  


Consolidated Balance Sheets

(dollars in millions)



















3-31-11



12-31-10



3-31-10

Assets













Loans


$

48,552



$

50,107



$

55,913


Loans held for sale



426




467




556


Securities available for sale



19,448




21,933




16,553


Held-to-maturity securities



19




17




22


Trading account assets



1,041




985




1,034


Short-term investments



3,705




1,344




4,345


Other investments



1,402




1,358




1,525



Total earning assets



74,593




76,211




79,948


Allowance for loan and lease losses



(1,372)




(1,604)




(2,425)


Cash and due from banks



540




278




619


Premises and equipment



906




908




872


Operating lease assets



491




509




652


Goodwill



917




917




917


Other intangible assets



20




21




46


Corporate-owned life insurance



3,187




3,167




3,087


Derivative assets



1,005




1,006




1,063


Accrued income and other assets



3,758




3,876




4,150


Discontinued assets



6,393




6,554




6,374



Total assets


$

90,438



$

91,843



$

95,303















Liabilities













Deposits in domestic offices:














NOW and money market deposit accounts


$

26,177



$

27,066



$

25,068



Savings deposits



1,964




1,879




1,873



Certificates of deposit ($100,000 or more)



5,314




5,862




10,188



Other time deposits



7,597




8,245




12,010



    Total interest-bearing deposits



41,052




43,052




49,139



Noninterest-bearing deposits



16,495




16,653




15,364


Deposits in foreign office — interest-bearing



3,263




905




646



    Total deposits



60,810




60,610




65,149


Federal funds purchased and securities sold under repurchase agreements



2,232




2,045




1,927


Bank notes and other short-term borrowings



685




1,151




446


Derivative liabilities



1,106




1,142




1,103


Accrued expense and other liabilities



1,931




1,931




2,089


Long-term debt



11,048




10,592




11,177


Discontinued liabilities



2,929




2,998




2,490



Total liabilities



80,741




80,469




84,381















Equity













Preferred stock, Series A



291




291




291


Preferred stock, Series B



—




2,446




2,434


Common shares



1,017




946




946


Common stock warrant



87




87




87


Capital surplus



4,167




3,711




3,724


Retained earnings



5,721




5,557




5,098


Treasury stock, at cost



(1,823)




(1,904)




(1,958)


Accumulated other comprehensive income (loss)



(35)




(17)




19



Key shareholders' equity



9,425




11,117




10,641


Noncontrolling interests



272




257




281



Total equity



9,697




11,374




10,922

Total liabilities and equity


$

90,438



$

91,843



$

95,303















Common shares outstanding (000)



953,926




880,608




879,052



Consolidated Statements of Income  

(dollars in millions, except per share amounts)















Three months ended




3-31-11