KeyCorp Reports Fourth Quarter 2014 Net Income of $246 Million, or $.28 Per Common Share

CLEVELAND, Jan. 22, 2015 /PRNewswire/ -- KeyCorp (NYSE: KEY) today announced fourth quarter net income from continuing operations attributable to Key common shareholders of $246 million, or $.28 per common share, compared to $197 million, or $.23 per common share, for the third quarter of 2014, and $229 million, or $.26 per common share, for the fourth quarter of 2013.  

For the twelve months ended December 31, 2014, net income from continuing operations attributable to Key common shareholders was $917 million, or $1.04 per common share, compared to $847 million, or $.93 per common share, for the same period one year ago.        

"Fourth quarter was a strong finish to the year," said Chairman and Chief Executive Officer Beth Mooney.  "Our results reflect positive operating leverage, with both revenue growth and well-controlled expenses.  Revenue benefited from solid loan growth, driven by a 12% increase from the prior year in commercial, financial and agricultural loans.  Core expense levels continued to decline, and our net charge-offs remained well below our historical average."

"Our full-year results reflect the successful execution of our strategy to grow and expand relationships, invest in our businesses, and return peer-leading capital to our shareholders," continued Mooney.  "We had a record year for investment banking and debt placement fees and remain on track with our successful integration of Pacific Crest Securities.  A 2% decrease in expenses drove positive operating leverage for the year, and we expect further improvement in efficiency and productivity."

"Capital remains a strength of our company.  We ended the year with a Tier 1 common equity ratio above 11%, while we continued to execute on our commitment to return capital to our shareholders through dividends and share repurchases.  During the year, we announced an 18% increase in the common share dividend and repurchased $496 million of common shares.  In total, we paid out 82% of 2014 net income to our shareholders," added Mooney.

FOURTH QUARTER 2014 FINANCIAL RESULTS, from continuing operations

Compared to Fourth Quarter of 2013

• Average loans up 5.5%, driven by a 12.3% growth in commercial, financial and agricultural loans
• Average deposits up 2% due to growth in commercial mortgage servicing and commercial deposits offsetting a decline in certificates of deposit
• Net interest income (taxable-equivalent) relatively stable, as growth in earning assets offset lower earning asset yields
• Noninterest income up $37 million, reflecting higher investment banking and debt placement fees, trust and investment services income, and corporate services income, offsetting declines in other income, mortgage servicing fees, and operating lease income and other leasing gains
• Noninterest expense down $8 million, reflecting lower efficiency- and pension-related charges and other expense, slightly offset by higher incentive compensation expense
• Efficiency initiative and pension settlement charges of $11 million, or $.01 per common share, incurred during the fourth quarter of 2014, compared to $24 million, or $.02 per common share, during the fourth quarter of 2013
• Asset quality improved, with net loan charge-offs to average loans declining from .27% to .22%
• Disciplined capital management, repurchasing $128 million of common shares during the fourth quarter of 2014 and maintaining top tier capital position with Tier 1 common equity of 11.18%

Compared to Third Quarter of 2014

• Average loans up 1.3%, primarily driven by an increase in commercial, financial and agricultural loans
• Average deposits up 2% due to the growth in commercial mortgage servicing and commercial deposits offsetting a decline in certificates of deposit
• Net interest income (taxable-equivalent) up $7 million due to an increase in earning asset levels and higher loan fees, offsetting lower earning asset yields
• Noninterest income up $73 million, primarily due to higher investment banking and debt placement fees, trust and investment services income, corporate services income, and corporate-owned life insurance income, slightly offset by declines in other income
• Noninterest expense stable, with lower efficiency- and pension-related charges and other expense offsetting higher incentive compensation expense
• Efficiency initiative and pension settlement charges of $35 million, or $.03 per common share, incurred during the third quarter of 2014
• Asset quality remains strong, with net loan charge-offs to average loans flat to prior quarter and remaining well below the targeted range

Taxable-equivalent net interest income was $588 million for the fourth quarter of 2014, and the net interest margin was 2.94%.  These results compare to taxable-equivalent net interest income of $589 million and a net interest margin of 3.01% for the fourth quarter of 2013.  The decrease in net interest margin was largely attributable to lower earning asset yields and higher levels of excess liquidity driven by commercial deposit growth.

Compared to the third quarter of 2014, taxable-equivalent net interest income increased by $7 million, and the net interest margin declined by two basis points.  The increase in net interest income was primarily due to higher earning asset levels and loan fees and a lower cost of funds as higher-rate certificates of deposit matured.  These increases were partially offset by the impact of lower earning asset yields.  The net interest margin was negatively impacted by higher levels of excess liquidity and lower earning asset yields partially offset by an increase in commercial loans and held-for-sale volume.    

Key's noninterest income was $490 million for the fourth quarter of 2014, compared to $453 million for the year-ago quarter.  The fourth quarter reflects a record high quarter for investment banking and debt placement fees, which increased $42 million, benefiting from Key's business model.  Trust and investment services income increased $14 million, mostly due to a full-quarter impact of the recently-acquired Pacific Crest Securities.  Corporate services income also increased $13 million, driven by higher derivatives income and non-yield loan fees.  These increases were partially offset by declines in other income of $12 million, mortgage servicing fees of $11 million, and operating lease income and other leasing gains of $11 million.     

Compared to the third quarter of 2014, noninterest income increased by $73 million.  Investment banking and debt placement fees and trust and investment services income increased $38 million and $13 million, respectively, benefitting from Key's business model.  Corporate-owned life insurance income had a seasonal increase of $12 million, and corporate services income increased $11 million due to higher derivatives income and non-yield loan fees.   

Key's noninterest expense was $704 million for the fourth quarter of 2014, compared to $712 million for the same period last year.  This decline reflects lower efficiency- and pension-related charges and other expense.  These decreases were slightly offset by higher incentive compensation expense related to the performance of our business and a full-quarter impact of the recently-acquired Pacific Crest Securities.

Compared to the third quarter of 2014, noninterest expense remained flat.  Lower expenses related to Key's efficiency initiative and pension settlement charges were offset by higher incentive compensation expense related to the performance of our business and a full-quarter impact of the recently-acquired Pacific Crest Securities. 

BALANCE SHEET HIGHLIGHTS

As of December 31, 2014, Key had total assets of $93.8 billion compared to $89.8 billion at September 30, 2014, and $92.9 billion at December 31, 2013.

Average loans were $56.5 billion for the fourth quarter of 2014, an increase of $2.9 billion compared to the fourth quarter of 2013.  The loan growth occurred primarily in the commercial, financial and agricultural portfolio, which increased $3 billion and was broad-based across Key's commercial lines of business.  Consumer loans declined slightly as modest increases across Key's core consumer loan portfolio were more than offset by run-off in Key's designated consumer exit portfolio.  

Compared to the third quarter of 2014, average loans increased by $745 million.  Commercial, financial and agricultural loans increased by $732 million, accounting for the majority of the loan growth.  On a period-end basis, commercial, financial and agricultural loans increased $1.3 billion over the linked quarter as most of the balance growth occurred towards the latter part of the fourth quarter.  Consumer loans were relatively unchanged from the linked quarter as modest growth in the core consumer loan portfolio during the fourth quarter was substantially offset by run-off in Key's consumer exit portfolio. 

Average deposits, excluding deposits in foreign office, totaled $69.1 billion for the fourth quarter of 2014, an increase of $1.3 billion compared to the year-ago quarter.  Demand deposits increased by $1.3 billion, and NOW and money market deposit accounts increased $977 million, mostly due to growth related to commercial client inflows as well as increases related to the commercial mortgage servicing business.  These increases were partially offset by run-off in certificates of deposit.       

Compared to the third quarter of 2014, average deposits, excluding deposits in foreign office, increased by $1.4 billion.  Demand deposits were up $1 billion, driven by large commercial client inflows.  Interest-bearing deposits increased $343 million as increases in NOW and money market deposits accounts more than offset the run-off in certificates of deposits.

Key's provision for loan and lease losses was $22 million for the fourth quarter of 2014, compared to $21 million for the third quarter of 2014 and $19 million for the year-ago quarter.  Key's allowance for loan and lease losses was $794 million, or 1.38% of total period-end loans, at December 31, 2014, compared to 1.43% at September 30, 2014, and 1.56% at December 31, 2013. 

Net loan charge-offs for the fourth quarter of 2014 totaled $32 million, or .22% of average total loans.  These results compare to $31 million, or .22%, for the third quarter of 2014, and $37 million, or .27%, for the same period last year.  

At December 31, 2014, Key's nonperforming loans totaled $418 million and represented .73% of period-end portfolio loans, compared to .71% at September 30, 2014, and .93% at December 31, 2013.  Nonperforming assets at December 31, 2014, totaled $436 million and represented .76% of period-end portfolio loans and OREO and other nonperforming assets, compared to .74% at September 30, 2014, and .97% at December 31, 2013.  

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at December 31, 2014.

As shown in the preceding table, at December 31, 2014, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios stood at 11.18% and 11.91%, respectively.  In addition, the tangible common equity ratio was 9.88% at December 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 10.69% at December 31, 2014.  This estimate exceeds the fully phased-in required minimum Common Equity Tier 1 and Capital Conservation Buffer of 7.00%.

As previously reported, Key's 2014 CCAR capital plan includes common share repurchases of up to $542 million, which include open market repurchases plus repurchases to offset issuances of common shares under our employee compensation plans, and are expected to be executed through the first quarter of 2015.  During the fourth quarter of 2014, Key completed $128 million of common share repurchases.

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 and lease balances up 3% from prior year
• Average core deposits up 1.3% from prior year
• Net income attributable to Key Community Bank up 47.6% from the prior year

Key Community Bank recorded net income attributable to Key of $62 million for the fourth quarter of 2014, compared to net income attributable to Key of $42 million for the year-ago quarter.

Taxable-equivalent net interest income decreased by $14 million, or 3.7%, from the fourth quarter of 2013.  Average loans and leases grew 3% while average core deposits increased 1.3% 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 increased $5 million, or 2.6%, from the year-ago quarter.  This increase was due to growth in trust and investment services income of $5 million, cards and payments of $3 million, and other noninterest income of $1 million.  Slightly offsetting these increases was a decline in service charges on deposit accounts of $4 million due to lower maintenance fees and overdraft charges. 

The provision for loan and lease losses decreased by $21 million, or 65.6%, from the fourth quarter of 2013.  Net loan charge-offs declined $3 million from the same period one year ago.

Noninterest expense declined by $19 million, or 4.1%, from the year-ago quarter as a result of Key's efficiency initiative.  Personnel expense declined $2 million compared to the fourth quarter of 2013.  Nonpersonnel expense decreased $17 million primarily due to internally-allocated costs.

Key Corporate Bank Summary of Operations

• Record high quarter and year for investment banking and debt placement fees
• Average loan and lease balances up 14.6% from the prior year
• Average deposits up 4.6% from the prior year

Key Corporate Bank recorded net income attributable to Key of $137 million for the fourth quarter of 2014, compared to $133 million for the same period one year ago. 

Taxable-equivalent net interest income increased by $19 million, or 9.6%, compared to the fourth quarter of 2013.  Average earning assets increased $2.7 billion, or 12.2%, from the year-ago quarter, primarily driven by loan growth in commercial, financial and agricultural and real estate commercial mortgage.  This growth in earning assets drove an increase of $9 million in earning asset spread.  Average deposit balances increased $788 million, or 4.6%, from the year-ago quarter, driven by commercial mortgage servicing deposits and other commercial client inflows.  This growth in deposit balances drove an increase of $8 million in deposit and borrowing spread.       

Noninterest income was up $34 million, or 16.4% from the prior year.  This growth was primarily due to a record high quarter for investment banking and debt placement fees, which increased $41 million or 48.8%, driven by Key's business model.  Corporate services income increased $14 million due to higher derivatives income and non-yield loan fees.  Trust and investment services income increased $9 million, mostly due to a full-quarter impact of the recently-acquired Pacific Crest Securities.  Partially offsetting these increases were declines in mortgage servicing fees due to lower special servicing fees, and other income.     

The provision for loan and lease losses increased $14 million compared to the fourth quarter of 2013 related to loan growth. 

Noninterest expense increased by $29 million, or 13.8%, from the fourth quarter of 2013.  This increase was due to higher incentive compensation expense related to the performance of the business and a full-quarter impact of the recently-acquired Pacific Crest Securities.

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 $51 million for the fourth quarter of 2014, compared to net income attributable to Key of $62 million for the same period last year.  These results were primarily attributable to decreases of $7 million in operating lease income and other leasing gains and $5 million in net interest income from the prior year.  

*****

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 $93.8 billion at December 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, January 22, 2015.  An audio replay of the call will be available through January 29, 2015.

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.