KeyCorp Reports Second Quarter Net Income Of $221 Million

CLEVELAND, July 19, 2012 /PRNewswire/ -- KeyCorp (NYSE: KEY) today announced second quarter net income from continuing operations attributable to Key common shareholders of $221 million, or $.23 per common share, compared to $199 million, or $.21 per common share for the first quarter of 2012, and $243 million, or $.26 per common share for the second quarter of 2011. For the six months ended June 30, 2012, net income from continuing operations attributable to Key common shareholders was $420 million, or $.44 per common share, compared to $427 million, or $.46 per common share for the same period one year ago.

SIGNIFICANT EVENTS

Company-wide initiatives to improve efficiency

• Expense reduction of $150-$200 million targeted by December 2013 – full benefit in 2014
• Changing cost structure to be more variable and aligned with operating environment
• Focused on organizational design, strategic sourcing, and branch rationalization

Completed acquisition of 37 branches in Upstate New York on July 13, 2012

• Seamless conversion adding $2.1 billion in deposits and $260 million in loans
• Credit card receivables of approximately $70 million to be added in September
• Strengthens market share and positions Key to acquire and deepen client relationships
• Liquidity used for debt maturities and to fund organic growth opportunities

Early termination of leveraged leases

• Opportunity to realize economic benefits in current low interest rate environment
• Gains are nontaxable pursuant to previous settlement with the IRS
• Accelerates reduction in exit portfolio

Executing on capital management priorities

• Repurchased 10.5 million shares at an average cost of $7.83 per share in the second quarter
• Increased common share dividend for the second quarter from $.03 to $.05 per share
• Redeemed $707 million of trust preferred securities on July 12, 2012

"Key's second quarter results reflect continued loan growth, improvement in credit quality, and disciplined expense control," said Chairman and Chief Executive Officer Beth Mooney. "We continue to benefit from the successful execution of our relationship strategy, which is driving client acquisition and engagement. We have seen five consecutive quarters of growth in commercial and industrial loans. Credit quality improved again this quarter as we continue to reduce our exit portfolio and add high quality new loan originations."

Mooney added: "To maintain our positive momentum, we are launching new efficiency initiatives and identifying opportunities to leverage our strong capital position to make attractive investments in our business, such as our recent branch acquisition in Upstate New York. These actions represent exciting new opportunities for Key to improve profitability by leveraging our brand, growing client relationships, and aligning our cost structure with the current operating environment."

SECOND QUARTER 2012 FINANCIAL RESULTS

• Net income up 11% from first quarter of 2012
• Maintained solid balance sheet with Tier 1 common equity of 11.7%
• Continued loan growth driven by commercial, financial and agricultural loan portfolio
• Further improvement in credit quality with net loan charge-offs to average loans ratio of .63% approaching long-term target and improving 19 basis points from prior quarter

Taxable-equivalent net interest income was $544 million for the second quarter of 2012, and the net interest margin was 3.06%. These results compare to taxable-equivalent net interest income of $570 million and a net interest margin of 3.19% for the second quarter of 2011. The second quarter of 2012 included a $13 million reduction to net interest income from the write-off of fees as well as capitalized loan origination costs due to the early termination of leveraged leases, resulting in a seven (7) basis point decline in the net interest margin. In addition, the decrease in net interest income and net interest margin resulted from the continuation of the low-rate environment contracting the spread between lending rates and funding costs.

Compared to the first quarter of 2012, taxable-equivalent net interest income decreased by $15 million, and the net interest margin declined by ten (10) basis points. The write-off of fees and capitalized loan origination costs from the early termination of leveraged leases was $7 million higher than in the first quarter of 2012, resulting in four (4) basis points of margin contraction. In addition, lower reinvestment yields on investment securities and loans coupled with an increase in short-term investment in anticipation of debt maturities pressured asset yields. This impact was partially offset by the maturity of higher rate certificates of deposit and an increase in demand and lower-cost liquid deposits, which reduced the overall cost of funds. The maturities of debt in the second quarter and the redemption of trust preferred securities on July 12 will benefit the net interest margin during the third quarter.

Key's noninterest income was $485 million for the second quarter of 2012, compared to $454 million for the year-ago quarter. Gains on leased equipment increased $31 million compared to the same period one year ago, primarily related to the early terminations of leveraged leases. Net gains (losses) from loan sales also increased $21 million from the year-ago quarter. These increases in noninterest income were partially offset by a $14 million decrease in electronic banking fees as a result of government pricing controls on debit transactions that went into effect October 1, 2011, and a $12 million decline in operating lease income.

Compared to the first quarter of 2012, noninterest income increased by $13 million. Gains on leased equipment increased $9 million, primarily related to the early terminations of leveraged leases in the second quarter of 2012. Net gains (losses) from loan sales also increased $10 million compared to the first quarter of 2012. These increases in noninterest income were partially offset by a decline in net gains (losses) from principal investing (including results attributable to noncontrolling interests) of $11 million.

Key's noninterest expense was $714 million for the second quarter of 2012, compared to $680 million for the same period last year. The provision (credit) for losses on lending-related commitments was an expense of $6 million compared to a credit of $12 million for the same period one year ago. Other real estate owned ("OREO") expense increased $10 million, and personnel expense increased $9 million due to increased hiring of client-facing personnel and annual merit increases. Business services and professional fees also increased $7 million, partially related to the company-wide efficiency initiatives, and marketing expense was $7 million higher as a result of the spring home equity loan campaign and Key's acquisition of 37 branches in Upstate New York, which closed on July 13. These increases in noninterest expenses were partially offset by a $10 million decrease in operating lease expense compared to the same period one year ago.

Compared to the first quarter of 2012, noninterest expense increased by $11 million. Business services and professional fees increased $13 million partially due to the company-wide efficiency initiatives discussed above, and the provision (credit) for losses on lending-related commitments increased $6 million.

BALANCE SHEET HIGHLIGHTS

As of June 30, 2012, Key had total assets of $86.5 billion compared to $87.4 billion at March 31, 2012, and $88.8 billion at June 30, 2011.

Average loans were $49.4 billion for the second quarter of 2012, an increase of $992 million compared to the second quarter of 2011. Commercial, financial and agricultural loans grew by $3.2 billion over the year-ago quarter, with nearly half of the growth originating in Key's Institutional Banking line of business. This growth was partially offset by declines in the commercial real estate portfolio, the equipment lease portfolios resulting from the early termination of certain leveraged leases in the exit portfolio, and run-off of consumer loans in the designated exit portfolio.

Compared to the first quarter of 2012, the balance of average loans was essentially unchanged. Commercial, financial and agricultural loans grew $494 million, and home equity loans also increased as a result of Key's spring home equity loan campaign. These increases were offset by declines in the real estate – commercial mortgage, and the equipment lease portfolios resulting from the early termination of certain leveraged leases in the exit portfolio.

Key originated approximately $10.3 billion in new or renewed lending commitments to consumers and businesses during the second quarter of 2012, which is up $2 billion from the first quarter of 2012.

Average deposits totaled $61.1 billion for the second quarter of 2012, an increase of $2.5 billion compared to the year-ago quarter. Most of the growth came from demand deposits, as increases in interest-bearing liquid deposits were largely offset by reductions in time deposit balances.

Compared to the first quarter of 2012, average deposits increased by $1.4 billion. Business demand deposits grew by $883 million, and interest-bearing demand deposits grew by $750 million. This increase in average deposits was partially offset by declines in certificates of deposit ($100,000 or more) and other time deposits.

Key's provision for loan and lease losses was a charge of $21 million for the second quarter of 2012, compared to a charge of $42 million for the first quarter of 2012 and a credit of $8 million for the year-ago quarter. Key's allowance for loan and lease losses was $888 million, or 1.79% of total period-end loans at June 30, 2012, compared to 1.92% at March 31, 2012, and 2.57% at June 30, 2011.

Net loan charge-offs for the second quarter of 2012 totaled $77 million, or .63% of average loans. These results compare to $101 million, or .82% for the first quarter of 2012, and $134 million, or 1.11% for the same period last year.

Compared to the first quarter of 2012, net loan charge-offs declined $24 million primarily due to stronger recoveries in the commercial loan portfolio. Key's exit loan portfolio accounted for $19 million, or 24.68% of Key's total net loan charge-offs for the second quarter of 2012. Net loan charge-offs in the exit loan portfolio decreased by $7 million from the first quarter of 2012 due to declines in net loan charge-offs in both the commercial and consumer loan portfolios.

At June 30, 2012, Key's nonperforming loans totaled $657 million and represented 1.32% of period-end portfolio loans, compared to 1.35% at March 31, 2012, and 1.76% at June 30, 2011. Nonperforming assets at June 30, 2012, totaled $751 million and represented 1.51% of portfolio loans and OREO and other nonperforming assets, compared to 1.55% at March 31, 2012, and 1.98% at June 30, 2011.

Nonperforming assets continued to decrease during the second quarter of 2012, representing the eleventh consecutive quarterly decline. OREO balances declined to $28 million at June 30, 2012, a decrease of $33 million from March 31, 2012.

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at June 30, 2012.

As shown in the preceding table, at June 30, 2012, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios stood at 11.7% and 12.5%, respectively. In addition, the tangible common equity ratio was 10.4% at June 30, 2012.

As previously announced, the Board of Directors authorized a common share repurchase program of up to $344 million to begin in the second quarter of this year through the first quarter of 2013. During the second quarter of 2012, Key repurchased 10,467,988 common shares at an average cost of $7.83 per share.

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

• Four consecutive quarters of average loan growth
• Strong spring borrowing campaign drove home equity balances 5% higher during second quarter
• Continued improvement in deposit mix
• Net loan charge-offs of 74 basis points at lowest level in four years

Key Community Bank recorded net income attributable to Key of $41 million for the second quarter of 2012, compared to net income attributable to Key of $34 million for the year-ago quarter.

Taxable-equivalent net interest income declined by $26 million, or 7% from the second quarter of 2011. Average loans and leases grew 3% while average deposits increased 1% from one year ago. Given the continued low-rate environment, the value derived from deposits was less in the current period compared to the same period one year ago.

Noninterest income increased by $4 million, or 2.2% from the year-ago quarter. Net gains (losses) from loan sales increased $9 million, and various other miscellaneous items increased $12 million. These increases in noninterest income were partially offset by a $14 million decline in electronic banking fees resulting from government pricing controls on debit transactions that went into effect October 1, 2011.

The provision for loan and lease losses declined by $68 million, or 86.1% compared to the second quarter of 2011, due to lower net loan charge-offs from the same period one year ago. Net loan charge-offs were $50 million for the second quarter of 2012, down $29 million from the same period one year ago.

Noninterest expense increased by $29 million, or 6.5% from the year-ago quarter. Key's acquisition of 37 branches in Upstate New York and the spring home equity loan campaign resulted in increases to marketing and technology expenses. Personnel expense also increased due to the hiring of client-facing personnel and annual merit increases. These increases in noninterest expense were partially offset by decreases in deferred loan origination expense and FDIC deposit insurance assessments from one year ago.

Key Corporate Bank Summary of Operations

• Acquired 166 new clients in the second quarter, up 41% from the first quarter
• Investment banking and debt placement fees were $69 million, up 17% from the first quarter
• Average loans up 8% from the prior year and flat to the prior quarter
• Average deposits up 22% from the prior year and 7% from the prior quarter

Key Corporate Bank recorded net income attributable to Key of $105 million for the second quarter of 2012, compared to net income attributable to Key of $164 million for the same period one year ago.

Taxable-equivalent net interest income increased by $6 million, or 3.4% compared to the second quarter of 2011. Average earning assets increased $1.3 billion, or 7% from the year-ago quarter, resulting in an increase in earning asset spread of $9 million. This increase was partially offset by a decrease in interest-related loan fees.

Noninterest income decreased by $5 million, or 2.3% from the second quarter of 2011. Decreases in trust and investment services income, operating lease income, and investment banking and capital markets income were partially offset by increases in net gains (losses) from loan sales and letter of credit and loan fees compared to the year-ago quarter.

The provision for loan and lease losses in the second quarter of 2012 was a charge of $4 million compared to a credit of $76 million for the same period one year ago. The charge in the second quarter of 2012 related to the increase in loans and leases, partially offset by continued improvement in the portfolio's asset quality for the eleventh consecutive quarter. Net loan charge-offs in the second quarter of 2012 were $9 million compared to $29 million for the same period one year ago.

Noninterest expense increased by $11 million, or 5.3% from the second quarter of 2011. The provision (credit) for losses on lending-related commitments was an expense of $6 million compared to a credit of $13 million one year ago. OREO expense also increased $10 million. These increases in noninterest expense were partially offset by decreases in operating lease expense of $5 million, personnel expense of $4 million, and other operating expenses.

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 $54 million for the second quarter of 2012, compared to net income attributable to Key of $42 million for the same period last year. These results were primarily attributable to a $21 million net gain resulting from the early terminations of leveraged leases in the second quarter of 2012 (a $31 million gain on leased equipment less a $10 million charge for the write-off of capitalized loan origination costs). These results were partially offset by an increase in the provision (credit) for loan and lease losses of $16 million compared to one year ago.

*****

Key traces its history back more than 160 years and is headquartered in Cleveland, Ohio. One of the nation's largest bank-based financial services companies, Key has assets of approximately $86.5 billion at June 30, 2012.

Key provides deposit, lending, cash management and investment services to individuals and small businesses through its 14-state branch network 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.

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, July 19, 2012. An audio replay of the call will be available through July 26, 2012.

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, except per share amounts)

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

The tangible common equity ratio has been a focus for some investors, and management believes this ratio 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.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

SOURCE KeyCorp