KeyCorp Reports First Quarter 2013 Net Income of $196 Million, or $.21 per Common Share

CLEVELAND, April 18, 2013 /PRNewswire/ -- KeyCorp (NYSE: KEY) today announced first quarter net income from continuing operations attributable to Key common shareholders of $196 million, or $.21 per common share, compared to $190 million, or $.20 per common share for the fourth quarter of 2012, and $195 million, or $.20 per common share for the first quarter of 2012.   During the first quarter Key incurred $15 million, or $.01 per common share of costs associated with its previously announced efficiency initiative.

SIGNIFICANT EVENTS

Agreement to sell Victory Capital Management and Victory Capital Advisors

• Victory results moved to discontinued operations for all periods presented
• Sale expected to close during the third quarter of 2013
• Estimated after-tax gain to be in the range of $145-$155 million

Continued progress on efficiency initiative

• Cash efficiency ratio improved to 66.0%
• Noninterest expense of $15 million, or $.01 per share associated with efficiency initiative during the first quarter of 2013
• Run rate savings of approximately $105 million annualized

Executing on capital management priorities

• Key's capital plan received no objection from the Federal Reserve
• Board authorized a common share repurchase program of up to $426 million
• Board will consider an increase to the quarterly common share dividend to $.055 per share at May meeting
• Key seeking no objection from the Federal Reserve to use the gain realized from the sale of Victory to repurchase common shares

"Our first quarter results highlight the strength of our business model and the progress we are making to ensure that Key is well-positioned for future growth," said Chairman and Chief Executive Officer Beth E. Mooney.  "We continued to experience growth in average loans; however, our customers remained cautious regarding the overall strength of the economy and were somewhat restrained in their borrowing during the quarter following a very strong fourth quarter.  Credit quality improved once again and we showed good progress controlling our expenses and improving our cash efficiency ratio to 66% during the quarter."

"Through the first quarter, we have realized $105 million in annualized expense savings, significant progress toward our $200 million goal by the end of 2013," continued Mooney.  "During the second quarter we expect to make further progress on our efficiency efforts as we consolidate branch locations and continue to work toward creating a variable cost base."

Mooney added:  "Capital management also remains a priority for Key.  In the first quarter, we repurchased 6.8 million shares and over the next four quarters, we expect to return a significant amount of our net income to shareholders through our planned capital actions we announced last month at the conclusion of the CCAR review.  Our plan included a share repurchase program of up to $426 million, which the Board approved last month, and an opportunity to increase the quarterly common share dividend by 10% to $.055 per share, which the Board will evaluate at their May meeting."

FIRST QUARTER 2013 FINANCIAL RESULTS

• Net interest income of $583 million, up $30 million from one year ago
• Net interest margin of 3.24%, up eight (8) basis points from the first quarter of 2012
• Continued average loan growth driven by 16.4% increase in commercial, financial and agricultural loans from one year ago
• Average deposits increased 6.7% from the first quarter of 2012
• Noninterest expense included $15 million associated with the efficiency initiative
• Cash efficiency ratio improved to 66.0%, down from 67.7% one year ago
• Net loan charge-offs decreased 51% from the first quarter of 2012 to .38% of average total loans
• Maintained solid balance sheet with Tier 1 common equity of 11.39%

Taxable-equivalent net interest income was $589 million for the first quarter of 2013, and the net interest margin was 3.24%.  These results compare to taxable-equivalent net interest income of $559 million and a net interest margin of 3.16% for the first quarter of 2012.  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, maturity of long-term debt, and maturity of higher-costing certificates of deposit during 2012.

Compared to the fourth quarter of 2012, taxable-equivalent net interest income decreased by $18 million, and the net interest margin declined by 13 basis points.  The decrease in net interest income was primarily due to a lower day count and a decline in the net interest margin, which was partially offset by an increase in average earning asset balances.  The decline in the net interest margin was largely attributable to lower yields on loans and investment securities and an increase in short-term investments.

Key's noninterest income was $425 million for the first quarter of 2013, compared to $442 million for the year-ago quarter.  Operating lease income and other leasing gains decreased $29 million primarily due to a $20 million gain on the early termination of a leveraged lease one year ago, and net gains (losses) from principal investing decreased by $27 million.  These decreases were partially offset by an $18 million increase in investment banking and debt placement fees and a $14 million increase in other income.

Compared to the fourth quarter of 2012, noninterest income decreased by $14 million.  Investment banking and debt placement fees declined $31 million.  Service charges on deposit accounts and corporate-owned life insurance income each decreased $6 million.  These declines in noninterest income were partially offset by a $6 million increase in net gains (losses) from principal investing and a $20 million increase in other income.

Key's noninterest expense was $681 million for the first quarter of 2013, compared to $679 million for the same period last year.  Personnel expense increased $19 million due to several factors – an increase in technology contract labor; higher incentive compensation expense accruals; and severance expense associated with Key's efficiency initiative.  Nonpersonnel expense decreased $17 million from one year ago.  Marketing expense, operating lease expense and various other miscellaneous expenses decreased from the year ago quarter.  These declines were partially offset by an increase of $11 million related to the amortization of the intangible assets associated with the third quarter 2012 acquisitions of the previously announced credit card portfolio as well as the branches in Western New York.

Compared to the fourth quarter of 2012, noninterest expense decreased by $53 million.  Personnel expense declined $31 million as salaries, technology contract labor, incentive compensation, employee benefits, stock-based compensation and severance expenses were all down from the fourth quarter of 2012.  Nonpersonnel expense decreased $22 million from the fourth quarter of 2012.  Business services and professional fees declined $19 million, and marketing expense decreased $14 million. These decreases were partially offset by an increase in the provision (credit) for losses on lending-related commitments, which was an expense of $3 million for the current quarter compared to a credit of $14 million for the prior quarter.

BALANCE SHEET HIGHLIGHTS

As of March 31, 2013 and December 31, 2012, Key had total assets of $89.2 billion compared to $87.4 billion at March 31, 2012.

Average loans were $52.6 billion for the first quarter of 2013, an increase of $3.2 billion compared to the first quarter of 2012.  Commercial, financial and agricultural loans grew by $3.3 billion over the year-ago quarter, with strong growth across Key's corporate and middle market segments.  In addition, the third quarter 2012 credit card portfolio and Western New York branch acquisitions added $1 billion of mostly consumer loans.  This growth was partially offset by managed declines in the commercial real estate portfolio, the equipment lease portfolio, which included the early termination of certain leveraged leases in the exit portfolio in 2012, and run-off of consumer loans in the designated exit portfolio. 

Compared to the fourth quarter of 2012, average loans increased by $767 million.  This average loan growth was attributable to an increase in commercial, financial and agricultural loans, partially offset by a decrease in home equity and other consumer loans.

Key originated approximately $8.5 billion in new or renewed lending commitments to consumers and businesses during the first quarter of 2013, compared to $10.2 billion during the fourth quarter of 2012 and $8.3 billion during the first quarter of 2012.

Average deposits totaled $63.6 billion for the first quarter of 2013, an increase of $4 billion compared to the year-ago quarter.  The growth reflects an increase in demand deposits of $2.9 billion and interest-bearing non-time deposits of $4.1 billion (including the impact of Key's third quarter 2012 Western New York branch acquisition, which added $2 billion of mostly interest-bearing non-time deposits).  This deposit growth was partially offset by $3 billion of run-off from one year ago in certificates of deposit and other time deposits.

Compared to the fourth quarter of 2012, average deposits decreased by $300 million.  This decline was primarily due to a decrease in deposits in foreign office.

Key's provision for loan and lease losses was $55 million for the first quarter of 2013, compared to $57 million for the fourth quarter of 2012 and $42 million for the year-ago quarter.  Key's allowance for loan and lease losses was $893 million, or 1.70% of total period-end loans at March 31, 2013, compared to 1.68% at December 31, 2012, and 1.92% at March 31, 2012.

Net loan charge-offs for the first quarter of 2013 totaled $49 million, or .38% of average total loans.  These results compare to $58 million, or .44% for the fourth quarter of 2012, and $101 million, or .82% for the same period last year. 

At March 31, 2013, Key's nonperforming loans totaled $650 million and represented 1.24% of period-end portfolio loans, compared to 1.28% at December 31, 2012 and 1.35% at March 31, 2012.  Nonperforming loans at December 31, 2012 included $46 million of loans related to the regulatory guidance issued in the second and third quarters of 2012.  Nonperforming assets at March 31, 2013, totaled $705 million and represented 1.34% of period-end portfolio loans and OREO and other nonperforming assets, compared to 1.39% at December 31, 2012, and 1.55% at March 31, 2012.  OREO balances declined $40 million from one year ago to $21 million at March 31, 2013.

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at March 31, 2013.

As shown in the preceding table, at March 31, 2013, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios stood at 11.39% and 12.18%, respectively.  In addition, the tangible common equity ratio was 10.24% at March 31, 2013.

During the first quarter of 2013, Key completed $65 million of Common Share repurchases on the open market under Key's share repurchase program.  Key's authority to repurchase Common Shares under the 2012 capital plan expired on March 31, 2013.

Key's Board of Directors has authorized management, pursuant to the 2013 capital plan submitted to the Federal Reserve and not objected to by the Federal Reserve, to repurchase up to $426 million of Key's Common Shares.  Common Share repurchases under the new 2013 capital plan authorization are expected to be executed from the second quarter of 2013 through the first quarter of 2014.  

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

• Seven consecutive quarters of average loan growth
• Core deposits up $4.4 billion, or 11.7% from the prior year

Key Community Bank recorded net income attributable to Key of $31 million for the first quarter of 2013, compared to $58 million for the year-ago quarter.

Taxable-equivalent net interest income increased by $4 million, or 1.1% from the first quarter of 2012.  Average loans and leases grew 11.6% while average deposits increased 3.9% from one year ago.  The Western New York branch and credit card portfolio acquisitions contributed $31 million to net interest income, $1 billion to average loans and leases, and $2 billion to deposits.  The positive contribution to net interest income from the acquisitions was partially offset by a lower earnings credit applied to deposits in the current period compared to the same period one year ago as a result of the continued low-rate environment.

Noninterest income increased by $13 million, or 7.4% from the year-ago quarter.  Cards and payments income increased $8 million as a result of the third quarter 2012 credit card portfolio acquisition.  Trust and investment services income increased $5 million, primarily due to an increase in assets under management resulting from strong market performance and increased production.

The provision for loan and lease losses increased by $55 million compared to the first quarter of 2012.  Net loan charge-offs, including the 2012 credit card acquisition, of $47 million were flat compared to the same period one year ago.

Noninterest expense increased by $4 million, or .9% from the year-ago quarter.  Expense reductions resulting from Key's efficiency initiative substantially offset the increase in expenses associated with Key's third quarter 2012 Western New York branch and credit card portfolio acquisitions.

Key Corporate Bank Summary of Operations

• Investment banking and debt placement fees were up $19 million, or 32.2% from the prior year
• Average loan balances up 7.8% from the prior year
• Average deposits up 20.8% from the prior year

Key Corporate Bank recorded net income attributable to Key of $105 million for the first quarter of 2013, compared to $91 million for the same period one year ago. 

Taxable-equivalent net interest income decreased by $9 million, or 4.6% compared to the first quarter of 2012.  Average earning assets increased $1.2 billion, or 5.7% from the year-ago quarter.  The benefit from the increase in average earning assets was offset by a decrease in earning asset spread driven by a change in the mix of new business volume and the run-off of higher yielding loans.   Average deposit balances increased $2.4 billion, or 20.8% from the year-ago quarter; however, the deposit spread decreased as a result of the continued low-rate environment.    

Noninterest income increased by $10 million, or 5.5 % from the first quarter of 2012.  Investment banking and debt placement fees increased $19 million, partially offset by a $7 million decrease in operating lease income and other leasing gains compared to the year-ago quarter. 

The provision for loan and lease losses decreased by $9 million compared to the first quarter of 2012.  There was a net loan recovery of $1 million for the first quarter of 2013 compared to net loan charge-offs of $25 million for the same period one year ago.

Noninterest expense decreased by $13 million, or 5.9% from the first quarter of 2012.  This decline was driven by a reduction in other operating expenses compared to the first quarter of 2012. 

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 $68 million for the first quarter of 2013, compared to net income attributable to Key of $50 million for the same period last year.  These results were primarily attributable to an increase in net interest income of $36 million and a decrease in the provision for loan and lease losses of $32 million.  These improvements were partially offset by a decline in noninterest income of $48 million primarily due to decreases in operating lease income and other leasing gains of $22 million and net gains (losses) from principal investing of $27 million.

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KeyCorp was organized more than 160 years ago and is headquartered in Cleveland, Ohio.  One of the nation's largest bank-based financial services companies, Key had assets of approximately $89.2 billion at March 31, 2013.

Key provides deposit, lending, cash management and investment services to individuals and small and mid-sized businesses in 14 states 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.

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, and profitability.  Forward-looking statements can be identified by words such as "expect," "believe," and "anticipate," and other similar references to future periods.  Forward-looking statements are not historical facts but instead represent 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 Form 10-K for the year ended December 31, 2012, 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).  These factors may include, among others: continued strain on the global financial markets as a result of economic slowdowns and concerns; current regulatory initiatives in the U.S., including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended, subjecting us to a variety of new and more stringent legal and regulatory requirements and increased scrutiny from our regulators; adverse behaviors in securities, public debt, and capital markets, including changes in market liquidity and volatility; and our ability to timely and effectively implement our strategic initiatives.  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.

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 18, 2013.  An audio replay of the call will be available through April 25, 2013.

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.

Cash efficiency ratio is a ratio of two non-GAAP performance measures. As such, there is no directly comparable GAAP performance measure.  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