KeyCorp Reports Fourth Quarter Net Income of $292 Million

CLEVELAND, Jan. 25, 2011 /PRNewswire/ --

• Net income from continuing operations of $292 million, or $.33 per common share, for the fourth quarter of 2010
• Full year net income from continuing operations of $413 million, or $.47 per common share
• Net interest margin at 3.31% for the fourth quarter of 2010
• Nonperforming loans down $304 million to 2.13% of period-end loans
• Nonperforming assets down $463 million
• Loan loss reserve at 3.20% of total period-end loans
• Reserve coverage ratio of nonperforming loans increased to 150% at December 31, 2010
• Net charge-offs declined to $256 million, or 2.00% of average loan balances, for the fourth quarter of 2010
• Tier 1 common equity and Tier 1 risk-based capital ratios estimated at 9.31% and 15.10%, respectively, at December 31, 2010

KeyCorp (NYSE: KEY) today announced fourth quarter net income from continuing operations attributable to Key common shareholders of $292 million, or $.33 per common share.  These results compare to a net loss from continuing operations attributable to Key common shareholders of $258 million, or $.30 per common share, for the fourth quarter of 2009.  The fourth quarter 2010 results reflect an improvement in pre-provision net revenue and lower credit costs from the same period one-year ago.  The fourth quarter 2009 results were negatively impacted by a $756 million loan loss provision.  Fourth quarter 2010 net income attributable to Key common shareholders was $279 million compared to a net loss attributable to Key common shareholders of $265 million for the same quarter one year ago.

For 2010, Key's net income from continuing operations attributable to common shareholders was $413 million, or $.47 per common share.  Results for the current year compare to a net loss from continuing operations attributable to Key common shareholders of $1.581 billion, or $2.27 per common share, for 2009.  The 2009 results were adversely impacted by an elevated loan loss provision and write-offs of certain intangible assets. Net income attributable to Key common shareholders for the year ended December 31, 2010, was $390 million compared to a net loss attributable to Key common shareholders of $1.629 billion for the same period one year ago.  

"Key's fourth quarter performance represents a strong finish to the year.  We continue to make meaningful progress in both profitability and credit quality," said Chairman and Chief Executive Officer Henry L. Meyer III.  "Furthermore, we are increasingly confident that the strategic actions we have undertaken will continue to yield favorable results into 2011."

"With three consecutive profitable quarters, and continued signs of increased economic activity on the part of our clients, Key has clearly turned the corner and is positioned well to compete in 2011," added Meyer.  "Our core financial measures – strong capital, enhanced liquidity, adequate loan loss reserves, as well as our exit from riskier lending categories – represent a firm foundation for profitability in the year ahead."  

Meyer said he was particularly pleased with Key's improvement in credit quality metrics and the Company's capital position.  Credit quality continued to improve across the majority of loan portfolios in both Key Community Bank and Key Corporate Bank, as nonperforming assets were down $463 million and nonperforming loans decreased by $304 million from the previous quarter, and net charge-offs declined to $256 million for the fourth quarter of 2010.

With respect to TARP repayment, Meyer stated:  “We are aware that certain of our peer banks have recently repaid TARP.  The Comprehensive Capital Assessment Plan we submitted on January 7, 2011, included our proposal for repaying the TARP preferred stock in a manner that we believe makes sense for Key and our shareholders.  Repaying TARP is a top priority for Key, but our patience has been appropriate because it has allowed us to demonstrate improved financial performance and an increased stock price.  Moreover, given the strength of our capital and our improved risk profile and profitability, it is our goal to repay TARP in a less dilutive manner than would have been achievable if we repaid prior to undergoing the Federal Reserve’s Comprehensive Capital Assessment.  All of this is subject to obtaining requisite regulatory approvals.”

At December 31, 2010, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios were 9.31% and 15.10%, compared to 8.61% and 14.30%, respectively, at September 30, 2010.

Key's strong capital and liquidity positions provide the Company with the ability to serve the borrowing needs of our clients as the economy expands. The Company originated approximately $8.5 billion in new or renewed lending commitments to consumers and businesses during the quarter and approximately $29.5 billion for the year ended December 31, 2010.  

Meyer also noted that over the last two years, Key has opened 77 new branches and renovated approximately 145 others, expanding Key's 14-state branch network to 1,033 branches.  The Company plans to build an additional 40 new branches in 2011.  Key also recently announced that it scored significantly higher than its four largest competitor banks in a third quarter 2010 customer satisfaction survey conducted by the American Customer Satisfaction Index.  Key's scores were significantly better than bank industry scores across multiple dimensions, most notably Customer Loyalty.  

During the quarter, Key announced that Meyer will retire on May 1, 2011, and that Beth E. Mooney has been elected President and Chief Operating Officer of KeyCorp and a member of KeyCorp's Board of Directors.  Mooney will assume the additional role of Chairman and Chief Executive Officer on May 1, 2011, and become the first woman CEO of a top 20 U.S. bank.  Mooney, who has over 30 years of experience in retail banking, commercial lending, and real estate financing, was previously Vice Chair of KeyCorp and head of Key's Community Bank business.

Key also announced the elections of William R. Koehler to President, Key Community Bank and Christopher M. Gorman to President, Key Corporate Bank (previously known as Key National Banking).  Koehler has 20 years of experience in the financial services industry, most recently as President of KeyBank's Great Lakes Region. In his new role, Koehler is responsible for Key's businesses associated with its 14-state branch network, including retail banking, small- and middle-market business banking, private banking, investment services and mortgage.  Gorman was previously the senior executive vice president and head of the now renamed Key Corporate Bank.

The following table shows Key's continuing and discontinued operating results for the comparative quarters and for the years ended December 31, 2010, and 2009.

SUMMARY OF CONTINUING OPERATIONS

Taxable-equivalent net interest income was $635 million for the fourth quarter of 2010, and the net interest margin was 3.31%.  These results compare to taxable-equivalent net interest income of $637 million and a net interest margin of 3.04% for the fourth quarter of 2009.  The increase in the net interest margin is primarily attributable to lower funding costs.  The Company continues to experience an improvement in the mix of deposits by reducing the level of higher costing certificates of deposit and growing lower costing transaction accounts.  This benefit to the net interest margin was partially offset by a lower level of average earning assets compared to the same period one year ago resulting from pay downs on loans.

Compared to the third quarter of 2010, taxable-equivalent net interest income decreased by $12 million, and the net interest margin declined four basis points.  The modest decline in the net interest margin reflects the combined effect of hedge maturities and change in the mix of earning assets, with average loan balances declining and average balances of lower yielding investment securities increasing.  These impacts were moderated by a continued decrease in the total cost of funds during this period due to the repricing of certificates of deposit and a continued overall improved mix of deposits.

Key's noninterest income was $526 million for the fourth quarter of 2010, compared to $469 million for the year-ago quarter.  Investment banking and capital markets income increased $110 million compared to the same period one-year ago.  In the fourth quarter of 2009, the Company incurred losses on certain real estate investments, recorded additional reserves on customer derivative positions, and recorded a loss on certain commercial mortgage-backed securities.  In total, these amounted to a reduction of fee income of $87 million in the fourth quarter of 2009.  This compares to income of $18 million recorded in the fourth quarter of 2010 as a result of improved credit quality.  In addition, net gains from loan sales increased $34 million from the fourth quarter of 2009, and the Company realized a gain of $28 million from the sale of Tuition Management Systems in the fourth quarter of 2010.  These gains were partially offset by decreases of $86 million in net gains (losses) from principal investing (including results attributable to noncontrolling interests), $12 million in service charges on deposit accounts, and $10 million in operating lease income from the fourth quarter of 2009.

The major components of Key's fee-based income for the past five quarters are shown in the following table.

Compared to the third quarter of 2010, noninterest income increased by $40 million.  The increase resulted from a $28 million gain from the sale of Tuition Management Systems and a $21 million increase in investment banking and capital markets income, primarily attributable to a positive adjustment to our customer derivative reserve.  In addition, the Company sold several investment securities during the quarter resulting in an increase of $11 million in net securities gains.  These increases were partially offset by a decrease of $24 million in net gains (losses) from principal investing (including results attributable to noncontrolling interests).

Key's noninterest expense was $744 million for the fourth quarter of 2010, compared to $871 million for the same period last year.  Key recorded a credit of $26 million to the provision for losses on lending-related commitments during the fourth quarter of 2010, compared to a charge to the provision of $27 million in the year-ago quarter. Also contributing to the decrease in noninterest expense was a decline in employee benefits expense of $41 million as a result of lower pension expense and medical claims expense.  Additionally, in the fourth quarter of 2010, operating lease expense was $22 million less and other real estate owned ("OREO") expense was $15 million less than the year-ago quarter.

Compared to the third quarter of 2010, noninterest expense increased by $8 million.  Increases in noninterest expense included $15 million in business services and professional fees, $6 million in personnel expense, $6 million in OREO expense, and $7 million in various other miscellaneous expenses. These increases were partially offset by decreases in the provision for losses on lending-related commitments of $16 million and operating lease expense of $12 million.

ASSET QUALITY

Key's provision for loan losses was a credit of $97 million for the fourth quarter of 2010, compared to a charge of $756 million for the year-ago quarter and $94 million for the third quarter of 2010.  Key's allowance for loan losses was $1.6 billion, or 3.20% of total period-end loans, at December 31, 2010, compared to 3.81% at September 30, 2010, and 4.31% at December 31, 2009.

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 quarter totaled $256 million, or 2.00%, of average loans.  These results compare to $708 million, or 4.64%, for the same period last year and $357 million, or 2.69%, for the previous quarter.  Net loan charge-offs declined each quarter during 2010 and are at their lowest level since the first quarter of 2008.

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 third quarter of 2010, net loan charge-offs in the commercial loan portfolio decreased by $102 million.  The decrease was primarily attributable to a decline in the commercial, financial and agricultural and the real estate – construction loan portfolios.  As shown in the table on page 7, Key's exit loan portfolio accounted for $81 million, or 31.64%, of Key's total net loan charge-offs for the fourth quarter of 2010.  Net charge-offs in the exit loan portfolio decreased by $24 million from the third quarter of 2010, primarily driven by an improvement in the commercial lease financing portfolio.

At December 31, 2010, Key's nonperforming loans totaled $1.1 billion and represented 2.13% of period-end portfolio loans, compared to 2.67% at September 30, 2010, and 3.72% at December 31, 2009.  Nonperforming assets at December 31, 2010, totaled $1.3 billion and represented 2.66% of portfolio loans and OREO and other nonperforming assets, compared to 3.48% at September 30, 2010, and 4.25% at December 31, 2009.  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 fourth quarter of 2010, representing the fifth consecutive quarterly decline and now stand at their lowest level since the third quarter of 2008.  Most of the reduction during the fourth quarter came from nonperforming loans in the commercial, financial and agricultural, the real estate – commercial mortgage, and the real estate – construction portfolios.  As shown in the following table, Key's exit loan portfolio accounted for $210 million, or 15.70%, of Key's total nonperforming assets at December 31, 2010, compared to $290 million, or 16.10%, at September 30, 2010.

The following table shows the composition of Key's exit loan portfolio at December 31, 2010, and September 30, 2010, the net charge-offs recorded on this portfolio for the third and fourth quarters of 2010, and the nonperforming status of these loans at December 31, 2010, and September 30, 2010.

CAPITAL

Key's risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at December 31, 2010.

As shown in the preceding table, at December 31, 2010, Key had an estimated Tier 1 common equity ratio of 9.31%, an estimated Tier 1 risk-based capital ratio of 15.10%, and a tangible common equity ratio of 8.19%.  Since December 31, 2009, Key's Tier 1 common equity ratio has increased 181 basis points as a result of returning to profitability and a lower level of risk-weighted assets.

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

During the fourth quarter of 2010, Key made a $31 million cash dividend payment to the U.S. Treasury Department as a participant in the U.S. Treasury's Capital Purchase Program.  During 2010 and 2009, Key made four quarterly dividend payments aggregating $125 million each year to the U.S. Treasury Department.

LINE OF BUSINESS RESULTS

The following table shows the contribution made by each major business group to Key's taxable-equivalent revenue from continuing operations and income (loss) from continuing operations attributable to Key for the periods presented.  The specific lines of business that comprise each of the major business groups are described under the heading "Line of Business Descriptions."  During the first quarter of 2010, Key realigned its reporting structure for its business groups.  Prior to 2010, Consumer Finance consisted mainly of portfolios that were identified as exit or run-off portfolios and were included in the Key Corporate Bank segment (previously known as Key National Banking).  Effective for all periods presented, Key is reflecting the results of these exit portfolios in Other Segments.  The automobile dealer floor plan business, previously included in Consumer Finance, has been realigned with the Commercial Banking line of business within the Key Community Bank segment.  In addition, other previously identified exit portfolios included in the Key Corporate Bank segment have been moved to Other Segments. For more detailed financial information pertaining to each business group and its respective lines of business, 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 $61 million for the fourth quarter of 2010, compared to a net loss attributable to Key of $40 million for the year-ago quarter.  A substantial decrease in the provision for loan losses was the main contributor to the improvement in the fourth quarter of 2010.

Taxable-equivalent net interest income declined by $34 million, or 8%, from the fourth quarter of 2009, due primarily to a decline in average deposits of $4 billion, or 9%.  The mix of deposits continues to change from the year-ago quarter as higher-costing certificates of deposit originated in prior years mature, partially offset by growth in noninterest-bearing deposits and NOW and money market savings accounts.  Average earning assets also decreased by $2 billion, or 7%, from the year-ago quarter.  

Noninterest income increased by $8 million, or 4%, from the year-ago quarter, due to higher income from mortgage loan sale gains, electronic banking fees, trust and investment services, and a reduction in the provision for credit losses from client derivatives.  These factors were partially offset by the anticipated lower service charges on deposits from the implementation of Regulation E which was consistent with Key's expectations.

The provision for loan losses declined by $156 million, or 68%, compared to the fourth quarter of 2009 due to improving economic conditions resulting in lower net charge-offs and nonperforming loans from the same period one year ago.

Noninterest expense declined by $33 million, or 7%, from the year-ago quarter.   The decrease was driven by reductions in personnel expense, the provision for losses on lending-related commitments, FDIC deposit insurance premiums, and corporate allocated costs. These improvements were partially offset by increased business services and professional fees, reflecting the cost of our third-party mortgage operations.  

Key Corporate Bank Summary of Operations

Key Corporate Bank recorded net income attributable to Key of $302 million for the fourth quarter of 2010, compared to a net loss attributable to Key of $213 million for the same period one year ago.  This improvement in the fourth quarter of 2010 was a result of a substantial decrease in the provision for loan losses.  

Taxable-equivalent net interest income decreased by $2 million, or 1%, compared to the fourth quarter of 2009, primarily due to lower earning assets, partially offset by improved earning asset yields and an increase in loan-related interest fees.  Average earning assets decreased by $5 billion, or 23%, from the year-ago quarter.  

Noninterest income increased by $126 million, or 95%, from the fourth quarter of 2009.  Investment banking and capital markets income increased $104 million. The fourth quarter of 2009 included a $78 million charge related to changes in the fair values of certain real estate investments compared to a charge of $1 million in the fourth quarter of 2010.  Also contributing to the improvement in noninterest income was the $28 million gain from the sale of Tuition Management Systems and an increase of $17 million in net gains from loan sales.  These gains were partially offset by decreases in trust and investment services income of $13 million and operating lease revenue of $6 million.

The provision for loan losses in the fourth quarter of 2010 was a credit of $263 million compared to a charge of $382 million for the same period one year ago.  Key Corporate Bank continued to experience improved asset quality for the fifth quarter in a row.

Noninterest expense decreased by $51 million, or 17%, from the fourth quarter of 2009 as a result of a credit of $18 million to the provision for losses on lending-related commitments compared to a charge of $14 million in the year-ago quarter. OREO expense and operating lease expense also declined from the fourth quarter of 2009.  These improvements were partially offset by an increase in various other miscellaneous expenses.

Other Segments

Other Segments consist of Corporate Treasury, Key's Principal Investing unit and various exit portfolios that previously were included within the Key Corporate Bank segment.  These exit portfolios were moved to Other Segments during the first quarter of 2010.  Prior periods have been adjusted to conform to the current reporting of the financial information for each segment.  Other Segments generated a net loss attributable to Key of $13 million for the fourth quarter of 2010, compared to a net loss attributable to Key of $57 million for the same period last year.  These results reflect net losses from principal investing (including results attributable to noncontrolling interests) of $5 million compared to net gains from principal investing (including results attributable to noncontrolling interests) of $80 million in the fourth quarter of 2009. This decline was partially offset by a decrease in the provision for loan losses of $43 million.  

Line of Business Descriptions

Key Community Bank

Regional Banking provides individuals with branch-based deposit and investment products, personal finance services and loans, including residential mortgages, home equity and various types of installment loans.  This line of business also provides small businesses with deposit, investment and credit products, and business advisory services.

Regional Banking also offers financial, estate and retirement planning, and asset management services to assist high-net-worth clients with their banking, trust, portfolio management, insurance, charitable giving and related needs.

Commercial Banking provides midsize businesses with products and services that include commercial lending, cash management, equipment leasing, investment and employee benefit programs, succession planning, access to capital markets, derivatives and foreign exchange.  

Key Corporate Bank

Real Estate Capital and Corporate Banking Services consists of two business units, Real Estate Capital and Corporate Banking Services.

Real Estate Capital is a national business that provides construction and interim lending, permanent debt placements and servicing, equity and investment banking, and other commercial banking products and services to developers, brokers and owner-investors.  This unit deals primarily with nonowner-occupied properties (i.e., generally properties in which at least 50% of the debt service is provided by rental income from nonaffiliated third parties).  Real Estate Capital emphasizes providing clients with finance solutions through access to the capital markets.  

Corporate Banking Services provides cash management, interest rate derivatives, and foreign exchange products and services to clients served by both the Key Community Bank and Key Corporate Bank groups.  Through its Public Sector and Financial Institutions businesses, Corporate Banking Services also provides a full array of commercial banking products and services to government and not-for-profit entities and community banks.  A variety of cash management services are provided through the Global Treasury Management unit.

Equipment Finance meets the equipment leasing needs of companies worldwide and provides equipment manufacturers, distributors and resellers with financing options for their clients.  Lease financing receivables and related revenues are assigned to other lines of business (primarily Institutional and Capital Markets and Commercial Banking) if those businesses are principally responsible for maintaining the relationship with the client.

Institutional and Capital Markets, through its KeyBanc Capital Markets unit, provides commercial lending, treasury management, investment banking, derivatives, foreign exchange, equity and debt underwriting and trading, and syndicated finance products and services to large corporations and middle-market companies.

Institutional and Capital Markets, through its Victory Capital Management unit, also manages or offers advice regarding investment portfolios for a national client base, including corporations, labor unions, not-for-profit organizations, governments and individuals.  These portfolios may be managed in separate accounts, common funds or the Victory family of mutual funds.

Cleveland-based KeyCorp (NYSE: KEY) is one of the nation's largest bank-based financial services companies, with assets of approximately $92 billion at December 31, 2010. Key companies provide investment management, retail and commercial banking, and investment banking products and services to individuals and companies throughout the United States and, for certain businesses, internationally. In 2010, KeyBank scored significantly higher than its four largest competitor banks in a customer satisfaction survey conducted by the American Customer Satisfaction Index, scoring significantly better than bank industry scores across multiple dimensions, most notably Customer Loyalty.  In 2009, KeyBank was awarded its seventh consecutive "Outstanding" rating for economic development achievements under the Community Reinvestment Act, the only national bank among the 50 largest in the United States to achieve this distinction from the Office of the Comptroller of the Currency.  Key also has been recognized for excellence in numerous areas of the multi-channel customer banking experience, including Corporate Insight's 2009 and 2010 editions of Bank Monitor for online service.  For more information about Key, visit https://www.key.com/.

Notes to Editors:

A live Internet broadcast of KeyCorp's conference call to discuss quarterly results and currently anticipated earnings trends and to answer analysts' questions can be accessed through the Investor Relations section at https://www.key.com/ir at 9:00 a.m. ET, on Tuesday, January 25, 2011.  An audio replay of the call will be available through February 1, 2011.

For up-to-date company information, media contacts and facts and figures about Key's lines of business, visit our Media Newsroom at https://www.key.com/newsroom.

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about Key's financial condition, results of operations, earnings outlook, asset quality trends and profitability.  Forward-looking statements are not historical facts but instead represent only management's current expectations and forecasts regarding future events, many of which, by their nature, are inherently uncertain and outside of Key's control.  Key's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.  Factors that could cause Key's actual results to differ materially from those described in the forward-looking statements can be found in Key's Annual Report on Form 10-K for the year ended December 31, 2009 and Quarterly Reports on Form 10-Q for the periods ended March 31, 2010, June 30, 2010, and September 30, 2010, which have been filed with the Securities and Exchange Commission and are available on Key's website (www.key.com) and on the Securities and Exchange Commission's website (www.sec.gov). Forward-looking statements are not guarantees of future performance and should not be relied upon as representing management's views as of any subsequent date.  Key does not undertake any obligation to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

The table below presents the computations of certain financial measures related to "tangible common equity" and "Tier 1 common equity."  The tangible common equity ratio has become a focus of some investors, and management believes that this ratio may assist investors in analyzing Key's capital position absent the effects of intangible assets and preferred stock.  Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and composition of capital, the calculation of which is prescribed in federal banking regulations.  As a result of the Supervisory Capital Assessment Program, the Federal Reserve has focused its assessment of capital adequacy on a component of Tier 1 capital, known as Tier 1 common equity.  Because the Federal Reserve has long indicated that voting common shareholders' equity (essentially Tier 1 capital less preferred stock, qualifying capital securities and noncontrolling interests in subsidiaries) generally should be the dominant element in Tier 1 capital, such a focus is consistent with existing capital adequacy guidelines and does not imply a new or ongoing capital standard.

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

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

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited.  To mitigate these limitations, Key has procedures in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components and to ensure that Key's performance is properly reflected to facilitate period-to-period comparisons.  Although these non-GAAP financial measures are frequently used by investors in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

SOURCE KeyCorp