KeyCorp Reports Second Quarter and First Half 2011 Net Income of $243 Million and $427 Million

CLEVELAND, July 19, 2011 /PRNewswire/ --

• Net income from continuing operations of $243 million, or $.26 per common share, for the second quarter of 2011
• Net income from continuing operations of $427 million, or $.46 per common share, for the first half of 2011
• Net interest margin at 3.19% for the second quarter of 2011
• Nonperforming loans declined to $842 million, or 1.76% of period-end loans
• Nonperforming assets declined to $950 million
• Loan loss reserve at 2.57% of total period-end loans and 146% of nonperforming loans at June 30, 2011
• Net charge-offs declined $59 million from the first quarter of 2011 to $134 million, or 1.11% of average loan balances
• Tier 1 common equity and Tier 1 risk-based capital ratios estimated at 11.01% and 13.76%, respectively, at June 30, 2011

KeyCorp (NYSE: KEY) today announced second quarter net income from continuing operations attributable to Key common shareholders of $243 million, or $.26 per common share. Key's second quarter 2011 results compare to net income from continuing operations attributable to Key common shareholders of $56 million, or $.06 per common share, for the second quarter of 2010.  The results for second quarter 2011 reflect an improvement in noninterest expense and lower credit costs from the same period one year ago.  Second quarter 2011 net income attributable to Key common shareholders was $234 million compared to net income attributable to Key common shareholders of $29 million for the same quarter one year ago.  

For the six-month period ended June 30, 2011, net income from continuing operations attributable to Key common shareholders was $427 million, or $.46 per common share, compared to a net loss from continuing operations attributable to Key common shareholders of $42 million, or $.05 per common share, for the same period one year ago.  Net income attributable to Key common shareholders for the six-month period ended June 30, 2011, was $407 million compared to a net loss attributable to Key common shareholders of $67 million for the same period one year ago.

During the second quarter of 2011, the Company continued to benefit from improved asset quality.  Nonperforming assets declined $1.1 billion, and nonperforming loans decreased by $861 million from the year-ago quarter to $950 million and $842 million, respectively.  Net charge-offs declined $301 million from the second quarter of 2010 to $134 million, or 1.11%, of average loan balances for the second quarter of 2011.

"Key's second quarter results represent another step forward for our company," said Chairman and Chief Executive Officer Beth Mooney.  "Our results reflected continued improvement in credit quality, disciplined expense management and continued execution of our business plan.  We were also encouraged by the growth in our commercial, financial and agricultural loan portfolio, which benefited from the strategic alignment between our relationship-focused Community Bank and the deep industry expertise and advisory capabilities of our Corporate Bank."

Mooney continued:  "We believe Key is well positioned for growth based on our strong capital, balance sheet and liquidity.  By continuing to focus on meeting our clients' borrowing needs, Key originated approximately $9.5 billion in new or renewed loans and commitments to consumers and businesses during the second quarter of 2011."

At June 30, 2011, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios were 11.01% and 13.76%, compared to 10.74% and 13.48%, respectively, at March 31, 2011.  The Board of Directors approved a quarterly dividend increase to $0.03 per common share for the second quarter of 2011.    

As previously reported, Key completed the repurchase of the $2.5 billion of Fixed-Rate Perpetual Preferred Stock, Series B and corresponding warrant issued to the U.S. Treasury Department.  As a result of the repurchase, the Company recorded a $49 million one-time deemed dividend in the first quarter of 2011 related to the remaining difference between the repurchase price and the carrying value of the preferred shares at the time of repurchase.  Beginning with the second quarter of 2011, the repurchase resulted in the elimination of quarterly dividends of $31 million and discount amortization of $4 million, or $140 million on an annual basis, related to these preferred shares.  In total, Key paid $2.867 billion to the U.S. Treasury during the investment period in the form of dividends, principal and repurchase of the warrant, resulting in a return to the U.S. Treasury of $367 million above the initial investment of $2.5 billion on November 14, 2008.

The following table shows Key's continuing and discontinued operating results for the comparative quarters and for the six-month periods ended June 30, 2011 and 2010.

SUMMARY OF CONTINUING OPERATIONS

Taxable-equivalent net interest income was $570 million for the second quarter of 2011, and the net interest margin was 3.19%.  These results compare to taxable-equivalent net interest income of $623 million and a net interest margin of 3.17% for the second quarter of 2010.  The decrease in net interest income is attributable to a decline in earning assets, partially offset by lower funding costs resulting from continued improvement in the mix of deposits.  This improved mix of deposits results from a reduction in the level of higher costing certificates of deposit.

Compared to the first quarter of 2011, taxable-equivalent net interest income decreased by $34 million, and the net interest margin declined six basis points.  The decline in the net interest margin and net interest income reflects the impact of a $3.2 billion decline in average earning assets resulting from the repayment of the TARP preferred stock at the end of the first quarter and the movement of approximately $1.5 billion of escrow deposits during the first quarter of 2011.  These escrow deposits were moved as a result of a change in the short-term ratings of KeyBank National Association by Moody's in November 2010.

Key's noninterest income was $454 million for the second quarter of 2011, compared to $492 million for the year-ago quarter.  Net gains (losses) from loan sales decreased $14 million from the second quarter of 2010.  In addition, operating lease income and service charges on deposit accounts both declined $11 million compared to the same period one year ago.  Consistent with Key's expectations, the reduction in service charges on deposit accounts is a result of the changes associated with implementing Regulation E in the third quarter of 2010.  Partially offsetting this decline in noninterest income from the second quarter of 2010 were increases in investment banking and capital markets income of $11 million and letter of credit and loan fees of $5 million.  

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

Compared to the first quarter of 2011, noninterest income decreased by $3 million.  The decline was a result of lower net gains (losses) from principal investing (including results attributable to noncontrolling interests) of $18 million, letter of credit and loan fees of $8 million, and net gains (losses) from loan sales of $8 million.  These decreases were partially offset by increases in various other income components.

Key's noninterest expense was $680 million for the second quarter of 2011, compared to $769 million for the same period last year.  Gains on sales of other real estate owned ("OREO") properties resulted in a credit of $3 million in OREO expense compared to expense of $22 million one year ago.  Also contributing to the decline in noninterest expense from the second quarter of 2010 were decreases of $24 million in FDIC deposit insurance premiums, $10 million in operating lease expense, and $13 million in various miscellaneous expenses.  

Compared to the first quarter of 2011, noninterest expense decreased by $21 million.  Decreases in noninterest expense included $20 million in FDIC deposit insurance premiums, $13 million in OREO expense and $8 million in provision (credit) for losses on lending-related commitments.  These decreases were partially offset by increases in personnel expense of $9 million and various miscellaneous expenses of $11 million.

ASSET QUALITY

Key's provision for loan and lease losses was a credit of $8 million for the second quarter of 2011, compared to a charge of $228 million for the year-ago quarter and a credit of $40 million for the first quarter of 2011.  Key's allowance for loan and lease losses was $1.2 billion, or 2.57% of total period-end loans, at June 30, 2011, compared to 2.83% at March 31, 2011, and 4.16% at June 30, 2010.

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 $134 million, or 1.11%, of average loans.  These results compare to $435 million, or 3.18%, for the same period last year and $193 million, or 1.59%, for the previous quarter.  Net loan charge-offs have declined for the last six consecutive quarters.

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 first quarter of 2011, net loan charge-offs in the commercial loan portfolio decreased by $40 million which was primarily attributable to a decline in the real estate – commercial mortgage category.  As shown in the table on page 6, Key's exit loan portfolio accounted for $25 million, or 18.7%, of Key's total net loan charge-offs for the second quarter of 2011.  Net charge-offs in the exit loan portfolio decreased by $16 million from the first quarter of 2011, primarily driven by an improvement in the marine loan portfolio.

At June 30, 2011, Key's nonperforming loans totaled $842 million and represented 1.76% of period-end portfolio loans, compared to 1.82% at March 31, 2011, and 3.19% at June 30, 2010.  Nonperforming assets at June 30, 2011, totaled $950 million and represented 1.98% of portfolio loans and OREO and other nonperforming assets, compared to 2.23% at March 31, 2011, and 3.88% at June 30, 2010.  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 second quarter of 2011, representing the seventh consecutive quarterly decline.  As shown in the following table, Key's exit loan portfolio accounted for $126 million, or 13.3%, of Key's total nonperforming assets at June 30, 2011.

The following table shows the composition of Key's exit loan portfolio at June 30, 2011, and March 31, 2011, the net charge-offs recorded on this portfolio for the first and second quarters of 2011, and the nonperforming status of these loans at June 30, 2011, and March 31, 2011.

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at June 30, 2011.

As shown in the preceding table, at June 30, 2011, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios stood at 11.01% and 13.76%, respectively.  In addition, the tangible common equity ratio was 9.67% at June 30, 2011.

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

During the first quarter of 2011, Key successfully completed a $625 million common equity offering and a $1 billion debt offering.  The proceeds from the equity and debt offerings, along with other available funds, were used to repurchase the $2.5 billion of Fixed-Rate Perpetual Preferred Stock, Series B issued to the U.S. Treasury Department as a result of Key's participation in the U.S. Treasury's Capital Purchase Program.  

LINE OF BUSINESS RESULTS

The following table shows the contribution made by each major business segment to Key's taxable-equivalent revenue from continuing operations and income (loss) from continuing operations attributable to Key for the periods presented.  The specific lines of business that comprise each of the major business segments are described under the heading "Line of Business Descriptions."  For more detailed financial information pertaining to each business segment 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 $34 million for the second quarter of 2011, compared to net income attributable to Key of $31 million for the year-ago quarter.  Decreases in the provision for loan and lease losses and noninterest expenses were offset by lower net interest income and noninterest income in the second quarter of 2011.

Taxable-equivalent net interest income declined by $34 million, or 8%, from the second quarter of 2010, due to declines in average earning assets and average deposits.  Average earning assets decreased by $1 billion, or 4%, from the year-ago quarter, reflecting reductions in the commercial and home equity loan portfolios.  Average deposits declined by $3 billion, or 5%, as higher-costing certificates of deposit mature, partially offset by growth in noninterest-bearing deposits and NOW and money market deposit accounts.

Noninterest income decreased by $9 million, or 5%, from the year-ago quarter, primarily due to lower service charges on deposits of $8 million from the implementation of Regulation E.

The provision for loan and lease losses declined by $42 million, or 35%, compared to the second quarter of 2010 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 $4 million, or 1%, from the year-ago quarter.  The decrease was driven by reductions in FDIC deposit insurance premiums of $20 million, offset by increases in personnel expense resulting from additional staffing for new branches and commercial lenders and various other operating costs.  

Key Corporate Bank Summary of Operations

Key Corporate Bank recorded net income attributable to Key of $163 million for the second quarter of 2011, compared to net income attributable to Key of $38 million for the same period one year ago.  This improvement in the second quarter of 2011 was a result of a substantial decrease in the provision for loan and lease losses as net charge-offs significantly declined between periods.  Noninterest expense also decreased from the second quarter of 2010.

Taxable-equivalent net interest income decreased by $24 million, or 12%, compared to the second quarter of 2010, due to lower average earning assets and average deposits.  Average earning assets decreased by $3.9 billion, or 18%, from the year-ago quarter.  Of this decrease, $3.7 billion was in the Real Estate Capital line of business as liquidity returned to the market for commercial real estate assets.  Average deposits declined by $2.2 billion, or 18%, from one year ago primarily as a result of the movement of $1.5 billion in escrow balances within the Real Estate Capital line of business in the first quarter of 2011.

Noninterest income increased by $7 million, or 3%, from the second quarter of 2010.  Contributing to the growth in noninterest income were increases in letter of credit and loan fees of $7 million and mortgage banking fees of $6 million.  This improvement was partially offset by declines in operating lease revenue of $5 million and service charges on deposit accounts of $3 million.

The provision for loan and lease losses in the second quarter of 2011 was a credit of $76 million compared to a charge of $99 million for the same period one year ago.  Key Corporate Bank continued to experience improved asset quality for the seventh quarter in a row.

Noninterest expense decreased by $43 million, or 17%, from the second quarter of 2010 due in part to a $25 million decline in OREO expense.  Also contributing to the improvement were decreases of $7 million in the provision for losses on lending-related commitments, $9 million in corporate support costs, and $4 million in operating lease expense. These improvements were partially offset by an increase in personnel expense of $6 million.

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 $43 million for the second quarter of 2011, compared to net income attributable to Key of $28 million for the same period last year.  These results are primarily attributable to a decrease in the provision for loan and lease losses of $17 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 $89 billion at June 30, 2011. 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 and significantly better than bank industry scores across multiple dimensions, most notably Customer Loyalty.  Key also has been recognized for excellence in numerous areas of the multi-channel customer banking experience, including Corporate Insight's 2010 edition of Bank Monitor for online service.  For more information about Key, visit https://www.key.com/.

NOTE 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, July 19, 2011.  An audio replay of the call will be available through July 26, 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 KeyCorp's Annual Report on Form 10-K for the year ended December 31, 2010, and its Quarterly Report on Form 10-Q for the period ended March 31, 2011, which have been filed with the Securities and Exchange Commission and are available on Key's website (www.key.com/ir) 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," "Tier 1 common equity" and "pre-provision net revenue."  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 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 and lease 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