KeyCorp Reports Third Quarter 2014 Net Income of $197 Million, or $.23 Per Common Share

CLEVELAND, Oct. 15, 2014 /PRNewswire/ -- KeyCorp (NYSE: KEY) today announced third quarter net income from continuing operations attributable to Key common shareholders of $197 million, or $.23 per common share, compared to $242 million, or $.27 per common share, for the second quarter of 2014, and $229 million, or $.25 per common share, for the third quarter of 2013. During the third quarter of 2014, Key incurred $35 million, or $.03 per common share, of costs related to both its efficiency initiative and a pension settlement charge, compared to $41 million, or $.03 per common share, during the third quarter of 2013.  

For the nine months ended September 30, 2014, net income from continuing operations attributable to Key common shareholders was $671 million, or $.76 per common share, compared to $618 million, or $.67 per common share, for the same period one year ago. During the nine months ended September 30, 2014, Key incurred $69 million, or $.05 per common share, of costs related to both its efficiency initiative and a pension settlement charge, compared to $93 million, or $.06 per common share, during the nine months ended September 30, 2013.

"Key's third quarter reflects solid results in our core businesses as we continue to execute on our relationship strategy, while remaining disciplined in managing risk and our strong capital position," said Chairman and Chief Executive Officer Beth Mooney. "Compared with the same period last year, average loans increased 5%, driven by growth in commercial, financial and agricultural loans. We saw positive trends in several of our fee-based businesses, while we realized lower gains from principal investing and leveraged lease terminations. In the third quarter, the number of retail clients grew and we improved sales productivity across both the Community Bank and Corporate Bank. We also closed the acquisition of Pacific Crest Securities during the quarter, adding an important new industry vertical and underscoring our commitment to be the leading corporate and investment bank serving middle market clients."

"Core expenses remained well-controlled and, excluding pension-related charges, were down from both the prior year and last quarter," added Mooney. "Third quarter expenses also included efficiency-related charges, costs from the Pacific Crest Securities acquisition, and ongoing investments that we are making in our businesses."  

"Our focus on risk management continues to be reflected in our strong credit quality trends, as well as the quality of loans that we are generating," continued Mooney. "Year-to-date net charge-offs are at historically low levels. Capital also remains a strength of our company. In the third quarter, our Tier 1 common equity ratio remained above 11%, while we continued to execute on our commitment to return capital to our shareholders through dividends and share repurchases. During the third quarter, we repurchased $119 million in common shares."  

THIRD QUARTER 2014 FINANCIAL RESULTS, from continuing operations

Compared to Third Quarter of 2013

• Average loans up 4.7%, driven by a 10.9% growth in commercial, financial and agricultural loans
• Average deposits up 3.6% due to commercial mortgage servicing acquisitions and growth in commercial deposits offsetting declines in certificates of deposit
• Net interest income (taxable-equivalent) down $3 million, primarily due to lower earning asset yields
• Noninterest income down $42 million, due to $27 million in lower operating lease income and other leasing gains mostly due to an early termination of a leveraged lease in the prior year, $8 million in lower principal investing gains, and a decline of $6 million in mortgage servicing fees due to lower special servicing fees, slightly offset by increases in noninterest income related to the recently-acquired Pacific Crest Securities
• Noninterest expense down $12 million, reflecting $6 million in lower efficiency and pension-related charges, and a decrease in the provision for losses on lending-related commitments, slightly offset by expenses related to the recently-acquired Pacific Crest Securities
• Asset quality improved, with net loan charge-offs to average loans declining from .28% to .22%
• Disciplined capital management, repurchasing $119 million of common shares during the third quarter of 2014 and maintaining a top tier capital position with Tier 1 common equity of 11.26%

Compared to Second Quarter of 2014

• Average loans up .3%, primarily driven by increases in real estate commercial mortgage loans
• Average deposits up 1.9% due to the growth in commercial mortgage servicing and commercial client inflows offsetting declines in certificates of deposit
• Net interest income (taxable-equivalent) up $2 million due to an increase in earning asset levels, higher loan fees, and more days in the quarter, which offset lower asset yields
• Noninterest income down $38 million, primarily due to $18 million in lower principal investing gains, a decrease of $18 million in operating lease income and other leasing gains mostly due to the early termination of a leveraged lease in the prior quarter, and an $11 million reduction in investment banking and debt placement fees, slightly offset by increases in noninterest income related to the recently-acquired Pacific Crest Securities
• Noninterest expense up $15 million, primarily due to $11 million in higher efficiency and pension-related charges, and expenses related to the recently-acquired Pacific Crest Securities
• Asset quality remains strong, with net loan charge-offs to average loans flat to prior quarter and remaining well below the targeted range

Taxable-equivalent net interest income was $581 million for the third quarter of 2014, and the net interest margin was 2.96%. These results compare to taxable-equivalent net interest income of $584 million and a net interest margin of 3.11% for the third quarter of 2013. The decreases in net interest income and net interest margin were largely attributable to lower earning asset yields. The net interest margin was additionally impacted by higher levels of excess liquidity driven by commercial deposit growth. The decrease in net interest income was partially offset by higher loan levels, a more favorable mix of lower-cost deposits, and higher loan fees as the prior year had an early termination of a leveraged lease.

Compared to the second quarter of 2014, taxable-equivalent net interest income increased by $2 million, and the net interest margin declined by two basis points. The increase in net interest income was primarily due to higher asset levels and loan fees, a lower cost of funds as higher-rate certificates of deposit matured, and more days in the third quarter. The net interest margin was negatively impacted by higher levels of excess liquidity, and lower earning asset yields.    

Key's noninterest income was $417 million for the third quarter of 2014, compared to $459 million for the year-ago quarter. Operating lease income and other leasing gains decreased $27 million as the prior year included the benefit of an early termination of a leveraged lease. Net gains from principal investing declined $8 million. Mortgage servicing fees decreased $6 million due to lower special servicing fees. These decreases were partially offset by an increase of $6 million in fee income related to the recently-acquired Pacific Crest Securities.   

Compared to the second quarter of 2014, noninterest income decreased by $38 million. Operating lease income and other leasing gains declined $18 million, primarily due to a gain from the early termination of a leveraged lease in the second quarter. Net gains from principal investing decreased $18 million. Investment banking and debt placement fees decreased $11 million from the strong performance in the prior quarter. These decreases were partially offset by increases in trust and investment services income and in other income of $5 million each. The current period included $6 million in fee income related to the recently-acquired Pacific Crest Securities.

Key's noninterest expense was $704 million for the third quarter of 2014, compared to $716 million for the same period last year. This decline reflects lower efficiency- and pension-related charges of $6 million. This decrease was slightly offset by $6 million of costs associated with the recently-acquired Pacific Crest Securities.       

Compared to the second quarter of 2014, noninterest expense increased by $15 million. The increase in expenses reflected $11 million in higher efficiency- and pension-related charges. Other expense increased $4 million due to expenses related to low-income housing tax credit investments. The third quarter of 2014 included $6 million of expenses related to the recently-acquired Pacific Crest Securities.

BALANCE SHEET HIGHLIGHTS

As of September 30, 2014, Key had total assets of $89.8 billion compared to $91.8 billion at June 30, 2014, and $90.7 billion at September 30, 2013.

Average loans were $55.8 billion for the third quarter of 2014, an increase of $2.5 billion compared to the third quarter of 2013.  The loan growth occurred primarily in the commercial, financial and agricultural portfolio, which increased $2.6 billion and was broad-based across Key's commercial lines of business.  Consumer loans remained relatively stable, as modest increases across Key's core consumer loan portfolio, primarily home equity loans and direct term loans, were more than offset by run-off in Key's designated consumer exit portfolio.  

Compared to the second quarter of 2014, average loans increased by $185 million.  Commercial loans increased $143 million with growth in real estate commercial mortgage loans offsetting decreases in commercial lease financing.  Commercial, financial and agricultural loans were relatively flat to the linked quarter as most of the balance growth occurred towards the latter part of the third quarter, resulting in a larger increase in period-end loans.  Modest consumer loan growth reflects growth in the core consumer loan portfolio during the third quarter, which offset a decrease in Key's consumer exit portfolio. 

Average deposits, excluding deposits in foreign office, totaled $67.7 billion for the third quarter of 2014, an increase of $2.4 billion compared to the year-ago quarter.  Demand deposits increased by $1.9 billion, and NOW and money market deposit accounts increased $1.2 billion, mostly due to growth related to commercial client inflows as well as increases related to the commercial mortgage servicing business.  These increases were partially offset by run-off in certificates of deposit.   

Compared to the second quarter of 2014, average deposits, excluding deposits in foreign office, increased by $1.3 billion.  Demand deposits were up $2.0 billion, driven by increases in escrow deposits in the commercial mortgage servicing business and inflows related to commercial clients.  Interest-bearing deposits decreased $732 million from lower NOW and money market deposit accounts as a result of a decline in public deposits, and run-off in certificates of deposit.

Key's provision for loan and lease losses was $21 million for the third quarter of 2014, compared to $10 million for the second quarter of 2014 and $28 million for the year-ago quarter.  Key's allowance for loan and lease losses was $804 million, or 1.43%, of total period-end loans at September 30, 2014, compared to 1.46% at June 30, 2014, and 1.62% at September 30, 2013. 

Net loan charge-offs for the third quarter of 2014 totaled $31 million, or .22%, of average total loans.  These results compare to $30 million, or .22%, for the second quarter of 2014, and $37 million, or .28%, for the same period last year.  

At September 30, 2014, Key's nonperforming loans totaled $401 million and represented .71% of period-end portfolio loans, compared to .71% at June 30, 2014, and 1.01% at September 30, 2013.  Nonperforming assets at September 30, 2014, totaled $418 million and represented .74% of period-end portfolio loans and OREO and other nonperforming assets, compared to .74% at June 30, 2014, and 1.08% at September 30, 2013.  

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at September 30, 2014.

As shown in the preceding table, at September 30, 2014, Key's estimated Tier 1 common equity and Tier 1 risk-based capital ratios stood at 11.26% and 12.00%, respectively.  In addition, the tangible common equity ratio was 10.29% at September 30, 2014.

In October 2013, federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the "Regulatory Capital Rules").  While the Regulatory Capital Rules became effective January 1, 2014, the mandatory compliance date for Key as a "standardized approach" banking organization begins on January 1, 2015, subject to transitional provisions extending to January 1, 2019.  Key's estimated Common Equity Tier 1 as calculated under the Regulatory Capital Rules was 10.71% at September 30, 2014.  This estimate exceeds the fully phased-in required minimum Common Equity Tier 1 and Capital Conservation Buffer of 7.00%.

As previously reported, Key's 2014 CCAR capital plan includes common share repurchases of up to $542 million, which are expected to be executed through the first quarter of 2015.  During the third quarter of 2014, Key completed $119 million of common share repurchases.

LINE OF BUSINESS RESULTS

The following table shows the contribution made by each major business segment to Key's taxable-equivalent revenue from continuing operations and income (loss) from continuing operations attributable to Key for the periods presented.  For more detailed financial information pertaining to each business segment, see the tables at the end of this release. 

Key Community Bank Summary of Operations

• Average loan and lease balances up 2.1% from prior year
• Average core deposits up 1.5% from prior year
• Net income attributable to Key Community Bank down 14.9% from the prior year

Key Community Bank recorded net income attributable to Key of $57 million for the third quarter of 2014, compared to net income attributable to Key of $67 million for the year-ago quarter.

Taxable-equivalent net interest income decreased by $25 million, or 6.5%, from the third quarter of 2013.  Average loans and leases grew 2.1% while average core deposits increased 1.5% from one year ago.  However, these volume-related increases were offset by declines in the deposit spread as a result of the continued low-rate environment.   

Noninterest income was flat at $199 million from the year-ago quarter.  Service charges on deposit accounts declined $5 million due to lower maintenance fees and overdraft charges.  This decrease was offset by increases of $2 million in cards and payments income and $3 million in other noninterest income. 

The provision for loan and lease losses increased by $7 million, or 29.2%, from the third quarter of 2013.  Net loan charge-offs increased $1 million from the same period one year ago.

Noninterest expense declined by $16 million, or 3.5%, from the year-ago quarter as a result of Key's efficiency initiative.  Personnel expense remained flat compared to the third quarter of 2013. Nonpersonnel expense decreased $16 million primarily due to a credit to the provision for unfunded commitments and declines in outside loan servicing and internally-allocated costs.

Key Corporate Bank Summary of Operations

• Completed the acquisition of Pacific Crest Securities, adding an important new industry vertical
• Average loan and lease balances up 13.8% from the prior year
• Average deposits up 7.9% from the prior year

Key Corporate Bank recorded net income attributable to Key of $119 million for the third quarter of 2014, compared to $106 million for the same period one year ago. 

Taxable-equivalent net interest income increased by $16 million, or 8.2%, compared to the third quarter of 2013.  Average earning assets increased $3.0 billion, or 13.8%, from the year-ago quarter, primarily driven by loan growth in commercial, financial and agricultural and real estate commercial mortgage.  This growth in earning assets drove an increase of $9 million in earning asset spread.  Average deposit balances increased $1.3 billion, or 7.9%, from the year-ago quarter, driven by commercial mortgage servicing acquisitions and other commercial client inflows.  This growth in deposit balances drove an increase of $3 million in deposit and borrowing spread.       

Noninterest income was flat from the prior year.  The recently-acquired Pacific Crest Securities added $6 million.  Other noninterest income increased $10 million due to higher trading income and miscellaneous gains on sale.  Offsetting these increases were declines in mortgage servicing fees due to lower special servicing fees, and decreases in cards and payments income, corporate services income, and other noninterest income items.     

The provision for loan and lease losses decreased $17 million compared to the third quarter of 2013. Net loan recoveries were less than $1 million for the third quarter of 2014 compared to net loan charge-offs of $6 million for the same period one year ago.

Noninterest expense increased by $9 million, or 4.4%, from the third quarter of 2013.  There were $6 million in costs related to the recently-acquired Pacific Crest Securities, and higher expenses related to low-income housing tax credit investments.

Other Segments

Other Segments consist of Corporate Treasury, Community Development, Key's Principal Investing unit, and various exit portfolios.  Other Segments generated net income attributable to Key of $48 million for the third quarter of 2014, compared to net income attributable to Key of $65 million for the same period last year.  These results were primarily attributable to a decrease of $27 million in operating lease income and other leasing gains due to the early termination of a leveraged lease in the prior year.  Net gains (losses) from principal investing also decreased $8 million from the prior year.   

Discontinued Operations

Discontinued Operations consists of Education Lending, Victory Capital Management and Victory Capital Advisors, and Austin Capital Management, Ltd.  During the third quarter of 2014, Key sold the residual interests in its nine education loan securitization trusts to a third party and retained the servicing for the loans associated with these securitization trusts. For the three months ended September 30, 2014, net income from discontinued operations for Education Lending was $4 million, which included the impact of the sale of the residual interests.

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KeyCorp was organized more than 160 years ago and is headquartered in Cleveland, Ohio.  One of the nation's largest bank-based financial services companies, Key had assets of approximately $89.8 billion at September 30, 2014.

Key provides deposit, lending, cash management and investment services to individuals and small and mid-sized businesses in 12 states under the name KeyBank National Association.  Key also provides a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications and derivatives to middle market companies in selected industries throughout the United States under the KeyBanc Capital Markets trade name.  For more information, visit https://www.key.com/.  KeyBank is Member FDIC.

INVESTOR RELATIONS: www.key.com/ir

KEY MEDIA NEWSROOM: www.key.com/newsroom

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about Key's financial condition, results of operations, and profitability.  Forward-looking statements can be identified by words such as "outlook," "goal," "objective," "plan," "expect," "anticipate," "intend," "project," "believe," or "estimate."  Forward-looking statements represent management's current expectations and forecasts regarding future events. If underlying assumptions prove to be inaccurate or unknown risks or uncertainties arise, actual results could vary materially from these projections or expectations.  Factors that could cause Key's actual results to differ from those described in the forward-looking statements can be found in KeyCorp's Form 10-K for the year ended December 31, 2013, which has been filed with the Securities and Exchange Commission and is available on Key's website (www.key.com/ir) and on the Securities and Exchange Commission's website (www.sec.gov).  These factors may include, among others: deterioration of commercial real estate market fundamentals, adverse changes in credit quality trends, declining asset prices, changes in local, regional and international business, economic or political conditions, and the extensive and increasing regulation of the U.S. financial services industry.  Forward looking statements speak only as of the date they are made and Key does not undertake any obligation to update the forward-looking statements to reflect new information or future events.

Notes to Editors:
A live Internet broadcast of KeyCorp's conference call to discuss quarterly results and currently anticipated earnings trends and to answer analysts' questions can be accessed through the Investor Relations section at https://www.key.com/ir at 9:00 a.m. ET, on Wednesday, October 15, 2014.  An audio replay of the call will be available through October 22, 2014.

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.

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GAAP to Non-GAAP Reconciliations
(dollars in millions)

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

The tangible common equity ratio and the return on tangible common equity ratio have been a focus for some investors, and management believes these ratios may assist investors in analyzing Key's capital position without regard to the effects of intangible assets and preferred stock.  Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations.  Since the commencement of the Comprehensive Capital Analysis and Review process in early 2009, the Federal Reserve has focused its assessment of capital adequacy on a component of Tier 1 risk-based capital known as Tier 1 common equity, a non-GAAP financial measure.  Because the Federal Reserve has long indicated that voting common shareholders' equity (essentially Tier 1 risk-based capital less preferred stock, qualifying capital securities, and noncontrolling interests in subsidiaries) generally should be the dominant element in Tier 1 risk-based capital, this focus on Tier 1 common equity is consistent with existing capital adequacy categories. 

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

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

The cash efficiency ratio is a ratio of two non-GAAP performance measures. As such, there is no directly comparable GAAP performance measure.  The cash efficiency ratio performance measure removes the impact of Key's intangible asset amortization from the calculation.  Management believes this ratio provides greater consistency and comparability between Key's results and those of its peer banks.  Additionally, this ratio is used by analysts and investors as they develop earnings forecasts and peer bank analysis.

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

SOURCE KeyCorp

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