KeyCorp Reports First Quarter 2012 Net Income of $199 Million, or $.21 Per Common Share

 

CLEVELAND, April 19, 2012 /PRNewswire/ --

• Net income from continuing operations of $199 million, or $.21 per common share for the first quarter of 2012
• Net interest margin of 3.16%, up three basis points from the fourth quarter of 2011
• Average total loans increased $766 million, or 6% annualized from the fourth quarter of 2011
• Net charge-offs declined to $101 million, or .82% of average loan balances for the first quarter of 2012
• Nonperforming loans declined to $666 million, or 1.35% of period-end loans, and nonperforming assets decreased to $767 million at March 31, 2012
• Loan loss reserve at 1.92% of total period-end loans and 141.7% of nonperforming loans at March 31, 2012
• Received no objection from the Federal Reserve to Key's capital plan, which included a common stock repurchase program and a plan to evaluate a dividend increase
• Tier 1 common equity and Tier 1 risk-based capital ratios estimated at 11.5% and 13.3%, respectively, at March 31, 2012

KeyCorp (NYSE: KEY) today announced first quarter net income from continuing operations attributable to Key common shareholders of $199 million, or $.21 per common share. This result compares to $184 million, or $.21 per common share for the first quarter of 2011, which included a deemed dividend of $49 million, or $.06 per diluted common share related to the accelerated amortization of the discount on the repurchased preferred shares from the U.S. Treasury. First quarter 2012 net income attributable to Key common shareholders was $194 million compared to net income attributable to Key common shareholders of $173 million for the same quarter one year ago.

During the first quarter of 2012, the Company continued to benefit from improved asset quality. Nonperforming loans decreased by $219 million and nonperforming assets declined by $322 million from the year-ago quarter to $666 million and $767 million, respectively. Net charge-offs declined to $101 million, or .82% of average loan balances for the first quarter of 2012, compared to $193 million, or 1.59% of average loan balances for the same period one year ago.

"Key's first quarter results demonstrate continued positive momentum as we execute on our relationship strategy, strengthen our balance sheet and maintain disciplined expense control," said Chairman and Chief Executive Officer Beth Mooney. "Asset quality improved again this quarter, and we were pleased to see growth in our commercial, financial and agricultural loan portfolio. Key remains committed to meeting the credit needs of its customers and communities."

Key originated approximately $8.3 billion in new or renewed lending commitments to consumers and businesses during the first quarter of 2012, which is up from $6.9 billion for the same period one year ago.

Mooney added that she was particularly pleased that Key received several industry honors and recognition in the first quarter. Corporate Insight's Bank Monitor commended Key for service excellence in categories including online bill pay, online account opening, alerts and fund transfers. Greenwich Associates' 2011 national banking survey recognized Key as a national and regional winner of three excellence awards for its small business banking and middle market banking.

At March 31, 2012, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios were 11.5% and 13.3%, compared to 11.3% and 13.0%, respectively, at December 31, 2011.

Mooney continued: "As previously announced, our Board of Directors has authorized a common stock repurchase program of up to $344 million to begin in the second quarter of this year through the first quarter of 2013. Our Board will also evaluate an increase in our quarterly common stock dividend from $.03 per share up to $.05 per share next month at its regular meeting. These actions, which are a part of our 2012 capital plan submitted to the Federal Reserve and to which the Federal Reserve had no objection, represent an opportunity for Key to return capital to our shareholders while still maintaining our peer leading capital to support organic growth."

As previously reported, on January 11, 2012, Key signed a purchase and assumption agreement to acquire 37 retail banking branches in Buffalo and Rochester, NY. The deposits associated with these branches total approximately $2.4 billion, while loans total approximately $400 million. The transaction is expected to close early third quarter of 2012, subject to customary closing conditions, including regulatory approval of the acquisition.

The following table shows Key's continuing and discontinued operating results for the three-month periods ended March 31, 2012, December 31, 2011 and March 31, 2011.

SUMMARY OF CONTINUING OPERATIONS

Taxable-equivalent net interest income was $559 million for the first quarter of 2012, and the net interest margin was 3.16%. These results compare to taxable-equivalent net interest income of $604 million and a net interest margin of 3.25% for the first quarter of 2011. The decrease in net interest income is attributed to a decline in both the net interest margin and earning assets. The net interest margin has been under pressure as a result of the continuation of the low-rate environment contracting the spread between lending rates and funding costs.

Compared to the fourth quarter of 2011, taxable-equivalent net interest income decreased by $4 million, and the net interest margin improved by three basis points. The slight decrease in net interest income is primarily due to the write-off of $6 million of capitalized loan origination costs resulting from the early termination of a leveraged lease in the first quarter of 2012. The improvement in the net interest margin resulted from a decrease in the balance of lower yielding short-term investments during the first quarter of 2012 and a continued decline in funding costs.

Key's noninterest income was $472 million for the first quarter of 2012, compared to $457 million for the year-ago quarter. Gains on leased equipment increased $23 million, primarily due to a $20 million gain related to the early termination of a leveraged lease, compared to the same period one year ago. Other income also increased $16 million from the year-ago quarter. These increases in noninterest income were partially offset by a $13 million decrease in operating lease income and a $13 million decline in electronic banking fees as a result of new government pricing controls on debit transactions that went into effect October 1, 2011.

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 2011, noninterest income increased by $58 million. Net gains (losses) from principal investing (including results attributable to noncontrolling interests) increased $43 million, and investment banking and capital markets income increased $19 million compared to the fourth quarter of 2011. Key's fourth quarter investment banking and capital markets income included a $24 million charge related to funding Visa's litigation escrow liability account. Gains on leased equipment increased $18 million resulting from the early termination of a leveraged lease in the first quarter of 2012. These increases in noninterest income were partially offset by declines in corporate-owned life insurance of $5 million, net gains (losses) from loan sales of $5 million and other income of $10 million.

Key's noninterest expense was $703 million for the first quarter of 2012, compared to $701 million for the same period last year. Personnel expense increased $14 million due to increased salaries and stock-based compensation expenses, partially offset by a decrease in incentive compensation. Nonpersonnel expense decreased $12 million compared to the same period one year ago with declines in operating lease expense, FDIC assessments and other real estate owned ("OREO") expense being offset by increases in marketing, the provision (credit) for losses on lending-related commitments and other expense.

Compared to the fourth quarter of 2011, noninterest expense decreased by $14 million. Business services and professional fees decreased $19 million and marketing expense declined $11 million. These decreases in noninterest expense from the fourth quarter of 2011 were partially offset by increases of $11 million in the provision (credit) for losses on lending-related commitments and $8 million in other expenses.

ASSET QUALITY

Key's provision for loan and lease losses was a charge of $42 million for the first quarter of 2012, compared to a credit of $40 million for the year-ago quarter and a credit of $22 million for the fourth quarter of 2011. Key's allowance for loan and lease losses was $944 million, or 1.92% of total period-end loans at March 31, 2012, compared to 2.03% at December 31, 2011, and 2.83% at March 31, 2011.

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 first quarter of 2012 totaled $101 million, or .82% of average loans. These results compare to $193 million, or 1.59% for the same period last year and $105 million, or .86% for the fourth quarter of 2011.

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 2011, net loan charge-offs in the commercial loan portfolio increased by $1 million and net loan charge-offs in the consumer loan portfolio decreased by $5 million. As shown in the table on page 6, Key's exit loan portfolio accounted for $26 million, or 25.74% of Key's total net loan charge-offs for the first quarter of 2012. Net loan charge-offs in the exit loan portfolio increased by $4 million from the fourth quarter of 2011 due to increases in net loan charge-offs in the commercial loan portfolios.

At March 31, 2012, Key's nonperforming loans totaled $666 million and represented 1.35% of period-end portfolio loans, compared to 1.47% at December 31, 2011, and 1.82% at March 31, 2011. Nonperforming assets at March 31, 2012, totaled $767 million and represented 1.55% of portfolio loans and OREO and other nonperforming assets, compared to 1.73% at December 31, 2011, and 2.23% at March 31, 2011. 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 first quarter of 2012, representing the tenth consecutive quarterly decline. As shown in the following table, Key's exit loan portfolio accounted for $103 million, or 13.43% of Key's total nonperforming assets at March 31, 2012.

The following table shows the composition of Key's exit loan portfolio at March 31, 2012, and December 31, 2011, the net charge-offs recorded on this portfolio for the first quarter of 2012 and fourth quarter of 2011, and the nonperforming status of these loans at March 31, 2012, and December 31, 2011.

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at March 31, 2012.

As shown in the preceding table, at March 31, 2012, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios stood at 11.5% and 13.3%, respectively. In addition, the tangible common equity ratio was 10.3% at March 31, 2012.

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 these offerings, along with other available funds, were used to repurchase the $2.5 billion of Series B Preferred Stock 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. Each of the major business lines is described under the heading "Line of Business Descriptions." 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

Key Community Bank recorded net income attributable to Key of $57 million for the first quarter of 2012, compared to net income attributable to Key of $81 million for the year-ago quarter.

Taxable-equivalent net interest income declined by $25 million, or 7% from the first quarter of 2011. Average loans and leases grew 1% while average deposits declined 1% from one year ago. Given the continued low-rate environment, the value derived from deposits was less in the current period.

Noninterest income decreased by $12 million, or 6% from the year-ago quarter, primarily due to a $13 million decline in electronic banking fees resulting from new government pricing controls on debit transactions that went into effect October 1, 2011.

The provision for loan and lease losses declined by $9 million, or 82% compared to the first quarter of 2011 due to lower net loan charge-offs from the same period one year ago. Net loan charge-offs were $49 million for the first quarter of 2012, down $27 million from the $76 million incurred in the same period one year ago.

Noninterest expense increased by $9 million, or 2% from the year-ago quarter. An increase in internally allocated costs and the provision (credit) for losses on lending-related commitments was partially offset by a reduction in FDIC deposit insurance assessments and a decline in personnel expense from one year ago.

Key Corporate Bank Summary of Operations

Key Corporate Bank recorded net income attributable to Key of $100 million for the first quarter of 2012, compared to net income attributable to Key of $126 million for the same period one year ago.

Taxable-equivalent net interest income was flat compared to the first quarter of 2011 as the decreased value derived from deposits was offset by an increase in average earning assets. Although average deposits increased $274 million, or 2%, the deposit spread decreased $11 million due to the prolonged low-rate environment. Average earning assets increased $869 million, or 4% from the year-ago quarter, and combined with lower levels of nonperforming assets, led to a $12 million increase in earning asset spread.

Noninterest income declined by $5 million, or 2% from the first quarter of 2011. A decrease in operating lease income and trust and investment services income was partially offset by an increase in net gains (losses) from loan sales compared to the year-ago quarter.

The provision for loan and lease losses in the first quarter of 2012 was a charge of $13 million compared to a credit of $21 million for the same period one year ago. The charge in the first quarter of 2012 related to the increase in loans and leases, partially offset by continued improvement in the portfolio's asset quality for the tenth consecutive quarter. Net loan charge-offs in the first quarter of 2012 were $25 million compared to $75 million for the same period one year ago.

Noninterest expense increased by $3 million, or 1% from the first quarter of 2011. A decrease in operating lease expense was partially offset by increases in other operating expenses.

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 $45 million for the first quarter of 2012, compared to net income attributable to Key of $58 million for the same period last year. These results were primarily attributable to an increase in the provision for loan and lease losses of $52 million in the exit portfolio. This increase was partially offset by a $14 million net gain resulting from the early termination of a leveraged lease in the first quarter of 2012 ($20 million gain on leased equipment less a $6 million charge for the write-off of capitalized loan origination costs).

Line of Business Descriptions

Key Community Bank

Key Community Bank serves individuals and small to mid-sized businesses through its 14-state branch network.

Individuals are provided branch-based deposit and investment products, personal finance services and loans, including residential mortgages, home equity and various types of installment loans. In addition, financial, estate and retirement planning, and asset management services are offered to assist high-net-worth clients with their banking, trust, portfolio management, insurance, charitable giving and related needs.

Small businesses are provided deposit, investment and credit products, and business advisory services. Mid-sized businesses are provided 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 commercial payment products are provided through the Enterprise Commercial Payments Group.

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.

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 billion at March 31, 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, April 19, 2012. An audio replay of the call will be available through April 26, 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, except per share amounts)

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

The tangible common equity ratio has been a focus for some investors, and management believes this ratio 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.

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