KeyCorp Reports Third Quarter 2010 and Year-To-Date Profit

CLEVELAND, Oct. 22 /PRNewswire-FirstCall/ --

• Net income from continuing operations of $163 million, or $.19 per common share, for the third quarter of 2010
• Year-to-date net income from continuing operations of $121 million, or $.14 per common share
• Net interest margin expanded 18 basis points from second quarter of 2010 to 3.35% for the third quarter of 2010
• Pre-provision net revenue from continuing operations (net interest income plus taxable-equivalent adjustment and noninterest income less noninterest expense) increased $51 million from second quarter of 2010 to $397 million for the third quarter of 2010
• Nonperforming loans decreased by $331 million from second quarter of 2010 to 2.67% of total period-end loans at September 30, 2010
• Loan loss reserve at 3.81% of total period-end loans and represented 143% coverage of nonperforming loans at September 30, 2010
• Net charge-offs declined to $357 million, or 2.69% of average loan balances, for the third quarter of 2010
• Tier 1 common equity and Tier 1 risk-based capital ratios estimated at 8.59% and 14.26%, respectively

KeyCorp (NYSE: KEY) today announced third quarter net income from continuing operations attributable to Key common shareholders of $163 million, or $.19 per common share.  These results compare to a net loss from continuing operations attributable to Key common shareholders of $422 million, or $.50 per common share, for the third quarter of 2009.  The third quarter 2009 results were negatively impacted by a $733 million loan loss provision.  Third quarter 2010 net income attributable to Key common shareholders was $178 million compared to a net loss attributable to Key common shareholders of $438 million for the same quarter one year ago. Net income attributable to Key common shareholders for the nine-month period ended September 30, 2010 was $111 million compared to a net loss attributable to Key common shareholders of $1.364 billion for the same period one year ago.  

Key's third quarter earnings improvement resulted from improved pre-provision net revenue and a lower provision for loan losses when compared to the second quarter of 2010.  Credit quality continued to improve across the majority of the loan portfolios in both Community Banking and National Banking.  Net charge-offs declined by $78 million, and nonperforming loans decreased by $331 million from June 30, 2010.  

"With the third quarter's results, Key has returned to profitability on a year-to-date basis," said Chief Executive Officer Henry L. Meyer III.  "We are pleased with our progress and recognize the important contributions of employees across Key who have remained focused on serving our clients through what has been the most challenging economic period in decades.  Our third quarter results reflect a higher net interest margin, continued credit quality improvement, well-controlled expenses, and improvements in several fee-based businesses."

Meyer continued: "Our work to lower our risk profile and proactively address credit issues is resulting in asset quality improvements across a majority of our loan portfolios and the fourth consecutive quarterly decline in nonperforming assets."

"Key's core financial measures – strong capital, enhanced liquidity, adequate loan loss reserves – along with our selective exits from riskier lending categories, together provide a firm foundation for growth as the economy strengthens," added Meyer.  

At September 30, 2010, Key's estimated Tier 1 common equity ratio was 8.59% compared to 8.07% at June 30, 2010, and estimated Tier 1 risk-based capital ratio was 14.26% up from 13.62% one quarter ago.  

Key's strong capital and liquidity positions provide the Company with the ability to serve the borrowing needs of our clients when the economy expands. The Company originated approximately $8.1 billion in new or renewed lending commitments to consumers and businesses during the quarter and approximately $21 billion for the nine-month period ended September 30, 2010.  

Meyer also noted that Key opened 34 new branches during the first nine months of 2010 and expects to open an additional five new branches during the fourth quarter of 2010, increasing its market presence in selected markets of its 14-state branch network.  In addition, Key's online account application features were ranked second among the 16 largest U.S. banks in Corporate Insight's September 2010 edition of Bank Monitor, a leading rating service for the online space.  Key had previously been recognized by Bank Monitor for its capabilities in the areas of online application, account information, and alerts.  The investment in new and modernized branches, coupled with the enhancements to online banking, reflect Key's relationship strategy and efforts to provide clients with a breadth of options that meet their specific banking needs.  The Company is positioning its branch and online capabilities to enhance growth as the economy turns.

The following table shows Key's continuing and discontinued operating results for the comparative quarters and for the nine-month periods ended September 30, 2010 and 2009.

Results of Operations

SUMMARY OF CONTINUING OPERATIONS

Taxable-equivalent net interest income was $647 million for the third quarter of 2010, and the net interest margin was 3.35%.  These results compare to taxable-equivalent net interest income of $599 million and a net interest margin of 2.80% for the third 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 increasing lower costing transaction accounts.  Key expects this change in funding mix to continue although at a slower pace going forward. This reduced pace will result from a lower volume of higher costing maturing certificates of deposit.  Additionally, Key experienced improved yields on loans due to lower levels of nonperforming loans.

Compared to the second quarter of 2010, taxable-equivalent net interest income increased by $24 million, and the net interest margin expanded by 18 basis points.  Most of this improvement is attributable to the repricing of certificates of deposit and an overall improved mix of deposits.  The Company's third quarter net interest margin also benefitted from reducing amounts invested in overnight short-term investments and investing these funds in collateralized mortgage-backed securities with an average duration of 2.5-3.5 years issued by government-sponsored entities.

Key's noninterest income was $486 million for the third quarter of 2010, compared to $382 million for the year-ago quarter.  Fee-based income improved by $95 million from the third quarter of 2009, which included increases of $68 million in investment banking and capital markets income and $15 million in letter of credit and loan fees. Also included in the third quarter of 2010 was a $12 million dividend from corporate-owned life insurance.

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

Fee-based Income – Major Components

Compared to the second quarter of 2010, noninterest income decreased by $6 million.  This decrease in noninterest income resulted from declines in net gains from loan sales of $7 million, the anticipated decrease in service charges on deposit accounts of $5 million from the implementation of Regulation E, and various miscellaneous income components of $34 million. These decreases were partially offset by increases of $19 million in letter of credit and loan fees and $11 million in investment banking and capital market income. In addition, Key recognized a $12 million corporate-owned life insurance dividend in the third quarter of 2010.

Key's noninterest expense was $736 million for the third quarter of 2010, compared to $901 million for the same period last year.  Key recorded a credit of $10 million to the provision for losses on lending-related commitments during the third quarter of 2010, compared to a charge to the provision of $29 million in the year-ago quarter. Also contributing to the decrease was a decline in employee benefits expense of $31 million, which included a $12 million credit to pension expense.  Additionally, in the third quarter of 2009, Key recognized a $45 million write-off of intangible assets and $51 million of other real estate owned ("OREO") expense, compared to OREO expense of $4 million for the third quarter of 2010.  

Compared to the second quarter of 2010, noninterest expense decreased by $33 million.  This decline was primarily a result of a $26 million decrease in employee benefits expense, which included the pension expense item discussed above, and a decrease in OREO expense of $18 million. These declines were partially offset by increases in net occupancy costs of $6 million primarily related to reserves on vacant corporate facilities and operating lease expense of $5 million for impaired leases.

ASSET QUALITY

Key's provision for loan losses was $94 million for the third quarter of 2010, compared to $733 million for the year-ago quarter and $228 million for the second quarter of 2010.  Key's allowance for loan losses was $2 billion, or 3.81% of total period-end loans, at September 30, 2010, compared to 4.16% at June 30, 2010, and 4.00% at September 30, 2009.

Selected asset quality statistics for Key for each of the past five quarters are presented in the following table.

Selected Asset Quality Statistics from Continuing Operations

Net loan charge-offs for the quarter totaled $357 million, or 2.69%, of average loans.  These results compare to $587 million, or 3.59%, for the same period last year and $435 million, or 3.18%, for the previous quarter.  

Key's net loan charge-offs by loan type for each of the past five quarters are shown in the following table.

Net Loan Charge-offs from Continuing Operations

Compared to the second quarter of 2010, net loan charge-offs in the commercial loan portfolio decreased by $77 million.  The decrease was attributable to a decline in the real estate commercial mortgage loan portfolio.  As shown in the table on page 6, Key's exit loan portfolio accounted for $105 million, or 29.41%, of Key's total net loan charge-offs for the third quarter of 2010.  Net charge-offs in the exit loan portfolio decreased by $9 million from the second quarter of 2010, primarily driven by an improvement in the marine portfolio.

At September 30, 2010, Key's nonperforming loans totaled $1.4 billion and represented 2.67% of period-end portfolio loans, compared to 3.19% at June 30, 2010, and 3.68% at September 30, 2009.  Nonperforming assets at September 30, 2010 totaled $1.8 billion and represented 3.48% of portfolio loans, OREO and other nonperforming assets, compared to 3.88% at June 30, 2010, and 4.46% at September 30, 2009.  The following table illustrates the trend in Key's nonperforming assets by loan type over the past five quarters.

Nonperforming Assets from Continuing Operations

Nonperforming assets continued to decrease during the third quarter of 2010, representing the fourth consecutive quarterly decline.  Most of the reduction came from nonperforming loans in the commercial, financial and agricultural and the real estate – construction portfolios.  As shown in the following table, Key's exit loan portfolio accounted for $290 million, or 16.10%, of Key's total nonperforming assets at September 30, 2010, compared to $385 million, or 18.46%, at June 30, 2010.

Shown in the following table are the composition of Key's exit loan portfolio at September 30, 2010, and June 30, 2010, the net charge-offs recorded on this portfolio for the second and third quarters of 2010, and the nonperforming status of these loans at September 30, 2010, and June 30, 2010.

Exit Loan Portfolio from Continuing Operations

CAPITAL

Key's risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at September 30, 2010.

Capital Ratios

As shown in the preceding table, at September 30, 2010, Key had an estimated Tier 1 common equity ratio of 8.59%, an estimated Tier 1 risk-based capital ratio of 14.26%, and a tangible common equity ratio of 8.00%.

Transactions that caused the change in Key's outstanding common shares over the past five quarters are summarized in the following table.

Summary of Changes in Common Shares Outstanding

During each of the first three quarters 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 2009, Key made four quarterly dividend payments aggregating $125 million 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 which were identified as exit or run-off portfolios and were included in Key's National Banking segment.  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 Community Banking segment.  In addition, other previously identified exit portfolios included in the National Banking 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.  

Major Business Groups

Community Banking

Community Banking Summary of Operations

Community Banking recorded net income attributable to Key of $57 million for the third quarter of 2010, compared to net income attributable to Key of less than $1 million for the year-ago quarter.  Decreases in the provision for loan losses and noninterest expense contributed to the improvement in the third quarter of 2010.

Taxable-equivalent net interest income declined by $31 million, or 7%, from the third quarter of 2009, due to declines in average earning assets and average deposits.  Average earning assets decreased $2 billion, or 8%, from the year-ago quarter, reflecting reductions in the commercial loan and home equity loan portfolios.  Average deposits declined by $4 billion, or 8%.  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 accounts.

Noninterest income increased by $2 million, or 1%, from the year-ago quarter, due to higher income from trust and investment services, electronic banking fees, and a reduction in the provision for credit losses from client derivatives.  The increase in trust and investment services income reflects increased performance in the Key Private Bank, as well as growth in Key's branch-based investment services.  These factors were partially offset by the anticipated lower service charges on deposits from the implementation of Regulation E.

The provision for loan losses declined by $85 million, or 53%, compared to the third quarter of 2009 due to improving economic conditions from one year ago.

Noninterest expense declined by $30 million, or 6%, from the year-ago quarter.   The decrease was driven by reductions in FDIC deposit insurance premiums of $9 million from the third quarter of 2009, a credit of $5 million recorded to the provision for losses on lending-related commitments compared to a charge of $7 million recorded in the third quarter of 2009, and a reduction in corporate allocated costs. These improvements were partially offset by increases in personnel expense and professional fees.  

National Banking

National Banking Summary of Operations

National Banking recorded net income attributable to Key of $130 million for the third quarter of 2010, compared to a net loss attributable to Key of $236 million for the same period one year ago.  This improvement in the third quarter of 2010 was a result of a substantial decrease in the provision for loan losses.  

Taxable-equivalent net interest income decreased by $16 million, or 7%, compared to the third quarter of 2009, primarily due to lower earning assets, partially offset by improved earning asset yields.  Average earning assets decreased by $7 billion, or 27%, from the year-ago quarter.  

Noninterest income increased $65 million, or 40%, from the third quarter of 2009.  Investment banking and capital markets income increased $56 million, letter of credit and loan fees increased $18 million, and net gains from loan sales were $8 million, compared to net losses from loan sales of $9 million for the same period one year ago.  These gains were offset by decreases in trust and investment services income of $8 million, operating lease revenue of $7 million, and various other miscellaneous income items from the third quarter of 2009.

The provision for loan losses in the third quarter of 2010 was a $25 million credit compared to a $439 million charge for the same period one year ago.  National Banking continued to experience improved asset quality for the fourth quarter in a row.

Noninterest expense decreased by $76 million, or 23%, from the third quarter of 2009 as a result of a decrease in the write-off of intangible assets of $45 million and a credit of $4 million to the provision for losses on lending-related commitments compared to a charge of $20 million in the year-ago quarter. OREO expense, operating lease expense, and the provision for losses on LIHTC guaranteed funds also declined from the third quarter of 2009.  These improvements were partially offset by an increase in personnel costs.

Other Segments

Other Segments consist of Corporate Treasury, Key's Principal Investing unit and various exit portfolios which were previously included within the National Banking segment.  These exit portfolios were moved to Other Segments during the first quarter of 2010.  Prior periods have been adjusted to conform with the current reporting of the financial information for each segment.  Other Segments generated net income attributable to Key of $19 million for the third quarter of 2010, compared to a net loss attributable to Key of $150 million for the same period last year.  These results reflect an increase in net interest income of $86 million from the third quarter of 2009 and a decrease in the provision for loan losses of $92 million.  

Line of Business Descriptions

Community Banking

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.  

National Banking

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 Community Banking and National Banking 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 to 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 $94 billion at September 30, 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 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 has also 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 Friday, October 22, 2010.  An audio replay of the call will be available through October 29, 2010.

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, and June 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.

GAAP to Non-GAAP Reconciliations

(dollars in millions, except per share amounts)

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