KeyCorp Reports First Quarter 2014 Net Income of $232 Million, or $.26 Per Common Share

CLEVELAND, April 17, 2014 /PRNewswire/ -- KeyCorp (NYSE: KEY) today announced first quarter net income from continuing operations attributable to Key common shareholders of $232 million, or $.26 per common share, compared to $229 million, or $.26 per common share, for the fourth quarter of 2013, and $196 million, or $.21 per common share, for the first quarter of 2013.     

"This was a solid quarter for Key, delivering on our commitments to generate positive operating leverage, maintain our strong risk management practices, and remain disciplined in the way we manage capital," said Chairman and Chief Executive Officer Beth Mooney.  "Revenue trends benefited from solid loan growth, driven by commercial, financial and agricultural loans, and the investments we made in our fee-based businesses.  Our results also demonstrate our continued focus on improving productivity and efficiency, with expenses declining from the year-ago period and prior quarter.  Our cash efficiency ratio was 65%, within our targeted range of 60% to 65%, and we remain committed to further improvement."

"Credit quality trends and our provision for loan losses continued to reflect our strong risk management practices, with both nonperforming loans and net charge-offs declining," added Mooney.

"Capital management also remains a priority for Key," continued Mooney.  "We expect to return a significant amount of our net income to shareholders over the next four quarters through the planned capital actions we announced last month at the conclusion of the CCAR review.  Our plan included a share repurchase program of up to $542 million, and, subject to approval by our Board of Directors, an increase of the quarterly common share dividend to $.065 per share.  We expect these actions will lead to an estimated payout ratio that is among the highest in our peer group for the second consecutive year."

FIRST QUARTER 2014 FINANCIAL RESULTS, from continuing operations

Compared with First Quarter of 2013

• Average loans up 4.0% (5.5% excluding impact of exit portfolios), driven by an 8.9% growth in commercial, financial and agricultural loans; period ending loans up 5.5%
• Average deposits up 3.9% due to commercial mortgage servicing acquisition and growth in commercial and public deposits offsetting declines in certificates of deposits
• Positive operating leverage as the decline in expense more than offset the decline in revenue
• Net interest income (taxable-equivalent) down $20 million, primarily due to lower asset yields and loan fees 
• Noninterest income up $10 million, reflecting higher principal investing gains, growth in investment banking and debt placement fees, and benefits from investments in commercial mortgage servicing
• Noninterest expense down $19 million, reflecting $5 million in lower efficiency-related charges, and the successful execution of our efficiency initiative
• Asset quality improved, with net loan charge-offs to average loans declining from .38% to .15%
• Disciplined capital management, with the announcement of new planned capital actions including a share repurchase program of up to $542 million, and, subject to approval by Key's Board of Directors, an increase of the quarterly common share dividend to $.065 per share

Compared with Fourth Quarter of 2013

• Average loans up 2.1%, driven by a 4.8% growth in commercial, financial and agricultural loans; period ending loans up 1.8%
• Average deposits down 3.2% due to the expected reduction of escrow deposits in the commercial mortgage servicing business
• Net interest income (taxable-equivalent) down $20 million due to lower asset yields as well as fewer days in the quarter
• Noninterest income down $18 million, reflecting a decline in corporate-owned life insurance income and lower commercial mortgage special servicing fees
• Noninterest expense down $50 million due to a decline of $12 million related to efficiency charges, and lower expenses for marketing, incentive compensation, and salaries
• Asset quality remains strong, with a 12 basis point improvement in net loan charge-offs to average loans
• Disciplined capital management, repurchasing $141 million of common shares during the first quarter of 2014 and maintaining a top tier capital position with Tier 1 common equity of 11.22%

Taxable-equivalent net interest income was $569 million for the first quarter of 2014, and the net interest margin was 3.00%.  These results compare to taxable-equivalent net interest income of $589 million and a net interest margin of 3.24% for the first quarter of 2013.  The decrease in net interest income and net interest margin is attributable to lower asset yields and loan fees, offsetting the impact of loan growth.  The decreases were also partially offset by the maturity of higher-rate certificates of deposits and a more favorable mix of lower-cost deposits. 

Compared to the fourth quarter of 2013, taxable-equivalent net interest income decreased by $20 million, and the net interest margin declined by one basis point.  The decrease in net interest income was primarily due to lower asset yields as well as fewer days in the first quarter of 2014.  The decrease was partially offset by increased loan growth and a lower cost of funds as higher-rate certificates of deposits matured.  

Key's noninterest income was $435 million for the first quarter of 2014, compared to $425 million for the year-ago quarter.  Key continued to see benefits from recent investments, with mortgage servicing fees increasing $7 million and card and payments income increasing $1 million.  Reflecting the benefits of Key's focus on targeted industries, investment banking and debt placement fees increased $5 million from the prior year.  In addition, net gains from principal investing increased $16 million.  These increases were partially offset by decreases of $8 million in other income mostly related to lower fixed income sales and trading income, a decline in service charges on deposit accounts of $6 million due to lower non-sufficient funds and overdraft charges, and a $5 million decrease in consumer mortgage income.   

Compared to the fourth quarter of 2013, noninterest income decreased by $18 million.  Mortgage servicing fees decreased $7 million as the fourth quarter of 2013 had higher commercial mortgage special servicing fees, and service charges on deposit accounts decreased $5 million due to lower non-sufficient funds and overdraft charges.  Corporate-owned life insurance income also declined $7 million due to seasonality of annual dividend payments in the fourth quarter. 

Key's noninterest expense was $662 million for the first quarter of 2014, compared to $681 million for the same period last year.  Excluding efficiency charges of $10 million in the first quarter of 2014 and $15 million in the first quarter of 2013, noninterest expense was down $14 million from the prior year.  The provision (credit) for losses on lending-related commitments decreased $5 million, which was a credit of $2 million in the current quarter compared to an expense of $3 million the prior year.  Additionally, there were declines in various other miscellaneous expenses.     

Compared to the fourth quarter of 2013, noninterest expense decreased by $50 million.  The reduction in expenses reflected $12 million in lower efficiency-related charges.  Marketing decreased $13 million from the prior quarter.  Personnel expense decreased $10 million due to lower incentive compensation and salary expense.  In addition, other expense decreased $12 million from the prior quarter. 

BALANCE SHEET HIGHLIGHTS

As of March 31, 2014, Key had total assets of $90.8 billion compared to $92.9 billion at December 31, 2013, and $89.2 billion at March 31, 2013.

Average loans were $54.7 billion for the first quarter of 2014, an increase of $2.1 billion compared to the first quarter of 2013.  The loan growth occurred primarily in the commercial, financial and agricultural portfolio, and was broad-based across Key's commercial lines of business.  Consumer loans increased $203 million, as the $430 million increase in home equity loans was partially offset by the $227 million decrease in other consumer loans.  The growth in home equity loans was balanced across Key's geographic footprint.    

Compared to the fourth quarter of 2013, average loans increased by $1.1 billion.  Commercial, financial and agricultural loans increased $1.2 billion.  Consumer loans declined $105 million, with $82 million of the decrease related to exit portfolios.

Average deposits, excluding deposits in foreign office, totaled $65.6 billion for the first quarter of 2014, an increase of $2.5 billion compared to the year-ago quarter.  Demand deposits increased by $1.3 billion and NOW and money market deposit accounts increased $2.1 billion, mostly due to growth related to commercial and public sector client inflows as well as increases related to the commercial mortgage servicing acquisition.  This growth was partially offset by run-off in certificates of deposit. 

Compared to the fourth quarter of 2013, average deposits, excluding deposits in foreign office, decreased by $2.1 billion.  Demand deposits were down $2.4 billion, driven by the expected reduction of escrow deposits in the commercial mortgage servicing business as well as seasonal outflows related to other commercial clients.  This decrease was partially offset by increases in NOW and money market deposit accounts.

Key's provision for loan and lease losses was $6 million for the first quarter of 2014, compared to $19 million for the fourth quarter of 2013 and $55 million for the year-ago quarter.  Key's allowance for loan and lease losses was $834 million, or 1.50%, of total period-end loans at March 31, 2014, compared to 1.56% at December 31, 2013, and 1.70% at March 31, 2013. 

Net loan charge-offs for the first quarter of 2014 totaled $20 million, or .15%, of average total loans.  These results compare to $37 million, or .27%, for the fourth quarter of 2013, and $49 million, or .38%, for the same period last year.  

At March 31, 2014, Key's nonperforming loans totaled $449 million and represented .81% of period-end portfolio loans, compared to .93% at December 31, 2013, and 1.24% at March 31, 2013.  Nonperforming assets at March 31, 2014, totaled $469 million and represented .85% of period-end portfolio loans and OREO and other nonperforming assets, compared to .97% at December 31, 2013, and 1.34% 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, 2014.

As shown in the preceding table, at March 31, 2014, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios stood at 11.22% and 11.96%, respectively.  In addition, the tangible common equity ratio was 10.14% at March 31, 2014.

In October 2013, federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the "Regulatory Capital Rules").  While the Regulatory Capital Rules became effective January 1, 2014, the mandatory compliance date for Key as a "standardized approach" banking organization begins on January 1, 2015, subject to transitional provisions extending to January 1, 2019.  Key's estimated Common Equity Tier 1 as calculated under the Regulatory Capital Rules was 10.67% at March 31, 2014.  This estimate exceeds the fully phased-in required minimum Common Equity Tier 1 and Capital Conservation Buffer of 7.00%.

Key completed its 2013 CCAR capital plan, including common share repurchases of $141 million, in the first quarter of 2014.  Key's 2014 CCAR capital plan includes common share repurchases of up to $542 million, which are expected to be executed through the first quarter of 2015.

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

• Average loan balances up 2.8% from prior year
• Average core deposits up 3.7% from prior year
• Net income attributable to Key Community Bank up 34% from the prior year

Key Community Bank recorded net income attributable to Key of $63 million for the first quarter of 2014, compared to net income attributable to Key of $47 million for the year-ago quarter.

Taxable-equivalent net interest income decreased by $24 million, or 6.2%, from the first quarter of 2013.  Average loans and leases grew 2.8% while average deposits increased 1% from one year ago.  However, these volume-related increases were offset by declines in the deposit spread as a result of the continued low-rate environment.    

Noninterest income declined by $10 million, or 5.3%, from the year-ago quarter.  Consumer mortgage income decreased $5 million, and service charges on deposit accounts declined $6 million due to lower non-sufficient funds and overdraft charges.  These decreases were partially offset by increases in cards and payments income and trust and investment services income of $2 million each.

The provision for loan and lease losses decreased by $50 million, or 84.7%, from the first quarter of 2013.  Net loan charge-offs decreased $19 million from the same period one year ago.

Noninterest expense declined by $9 million, or 2%, from the year-ago quarter as a result of Key's efficiency initiative.  Personnel expense decreased $18 million primarily due to declines in salaries, incentive compensation, and employee benefits.  This decrease was partially offset by a $9 million increase in nonpersonnel expense primarily due to increases in the provision for losses on lending-related commitments, miscellaneous expense, and other support costs.

Key Corporate Bank Summary of Operations

• Average loan balances up 10.2% from the prior year
• Average deposits up 13.1% from the prior year
• Total revenue increased 2.1% from prior year
• Investment banking and debt placement fees increased 6.3% from the prior year

Key Corporate Bank recorded net income attributable to Key of $122 million for the first quarter of 2014, compared to $113 million for the same period one year ago. 

Taxable-equivalent net interest income decreased by $1 million, or .5%, compared to the first quarter of 2013.  Average earning assets increased $2.3 billion, or 11.1%, from the year-ago quarter, primarily driven by loan growth in commercial, financial and agricultural and real estate commercial mortgage. This growth was broad-based across the Corporate Bank lines of business.  The increase in earning assets was offset by declines from loan spread compression.  Average deposit balances increased $1.8 billion, or 13.1%, from the year-ago quarter, driven by increases in Public Sector as well as increases related to the commercial mortgage servicing acquisition.  This increase in deposit balances was more than offset by declines in the deposit spread as a result of the continued low-rate environment.

Noninterest income increased by $9 million, or 4.8%, from the first quarter of 2013.  This increase was driven by higher mortgage servicing fees of $7 million, operating lease income and other leasing gains of $6 million, and investment banking and debt placement fees of $5 million from the year-ago quarter.   Offsetting these increases was an $8 million decrease in other income primarily due to declines in fixed income sales and trading. 

The provision for loan and lease losses decreased $3 million compared to the first quarter of 2013.   Net loan charge-offs decreased $13 million from the same period one year ago primarily due to a sizable recovery.

Noninterest expense decreased by $4 million, or 2%, from the first quarter of 2013.  A lower provision for losses on lending-related commitments and reduced miscellaneous expenses offset increases in personnel expense.    

Other Segments

Other Segments consist of Corporate Treasury, Community Development, Key's Principal Investing unit, and various exit portfolios.  Other Segments generated net income attributable to Key of $53 million for the first quarter of 2014, compared to net income attributable to Key of $43 million for the same period last year.  These results were primarily attributable to an increase in net gains (losses) from principal investing of $16 million. 

*****

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 $90.8 billion at March 31, 2014.

Key provides deposit, lending, cash management and investment services to individuals and small and mid-sized businesses in 12 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.

INVESTOR RELATIONS: www.key.com/ir                        

KEY MEDIA  NEWSROOM: 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, and profitability.  Forward-looking statements can be identified by words such as "outlook," "goal," "objective," "plan," "expect," "anticipate," "intend," "project," "believe," or "estimate."  Forward-looking statements represent management's current expectations and forecasts regarding future events. If underlying assumptions prove to be inaccurate or unknown risks or uncertainties arise, actual results could vary materially from these projections or expectations.  Factors that could cause Key's actual results to differ from those described in the forward-looking statements can be found in KeyCorp's Form 10-K for the year ended December 31, 2013, 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: deterioration of commercial real estate market fundamentals, adverse changes in credit quality trends, declining asset prices, changes in local, regional and international business, economic or political conditions, and the extensive and increasing regulation of the U.S. financial services industry.  Forward looking statements speak only as of the date they are made and Key does not undertake any obligation to update the forward-looking statements to reflect new information or future events.

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 17, 2014.  An audio replay of the call will be available through April 24, 2014.

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.

GAAP to Non-GAAP Reconciliations
(dollars in millions)

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

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

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

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

The cash efficiency ratio 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 as they develop 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.