KeyCorp reports second quarter net income of $193 or 21 cents per common share

Posted on July 18, 2013 

 

KEYCORP REPORTS SECOND QUARTER 2013 
NET INCOME OF $193 MILLION, OR $.21 PER COMMON SHARE 

Efficiency initiative results in achieved annualized run rate savings of approximately 
$171 million through the second quarter of 2013   



CLEVELAND, July 18, 2013 – KeyCorp (NYSE: KEY) today announced second quarter net income from continuing operations attributable to Key common shareholders of $193 million, or $.21 per common share, compared to $196 million, or $.21 per common share for the first quarter of 2013, and $217 million, or $.23 per common share for the second quarter of 2012.   During the second quarter, Key incurred $37 million, or $.03 per common share of costs associated with its previously announced efficiency initiative. 

For the six months ended June 30, 2013, net income from continuing operations attributable to Key common shareholders was $389 million, or $.42 per common share, compared to $412 million, or $.43 per common share for the same period one year ago. During the first half of 2013, Key incurred $52 million, or $.04 per common share of costs related to its efficiency initiative. 
  
CURRENT QUARTER DEVELOPMENTS 

Executing on growth initiatives 
·        Acquiring a commercial mortgage servicing portfolio and special servicing business, building scale and becoming one of the top three largest named servicers of commercial/multifamily loans in the U.S. and the fifth largest special servicer of CMBS (Initial closing completed in June; final closing expected in July) 
·        Expanded mobile offering with the launch of new remote deposit capabilities for both consumer and commercial clients 

Continued progress on efficiency initiative 
·        Achieved annualized run rate savings of approximately $171 million through the second quarter of 2013 
·        Recognized expenses of $37 million, or $.03 per common share associated with efficiency initiative during the second quarter of 2013 
·        Cash efficiency ratio of 69.06%, and adjusted cash efficiency ratio net of efficiency initiative charges of 65.42% for the second quarter of 2013 
·        Consolidated 33 branches during the second quarter of 2013 
·        Realigned Community Bank organization around core relationship strategy to drive profitability 

Focused on capital management priorities 
·        Repurchased $112 million of common shares during the second quarter of 2013 
·        Increased common share dividend by 10% to $.055 per common share 


“During the second quarter, the strength of our business model continued to drive results. Key made clear progress implementing growth initiatives, improving its cost structure and executing capital priorities,” said Chairman and Chief Executive Officer Beth Mooney. 

“Compared to the first quarter, cautious client behavior led to slower loan growth, higher levels of liquidity for Key and greater than anticipated pressure on our net interest margin. Despite the challenging economic backdrop, Key was able to produce slight increases in both loans and revenue and control expenses. Further, we stayed true to our commitment of disciplined capital management by repurchasing $112 million in common shares and increasing our dividend by 10%,” continued Mooney. 

Mooney added: “To maintain and enhance our growth, we also continued to invest in our businesses. We are in the process of acquiring a commercial mortgage servicing portfolio and special servicing business that will significantly enhance our scale and presence in the market. We also launched new mobile capabilities that add accessibility and functionality for both our consumer and commercial clients. Our efficiency initiative, which began in June 2012, remains on target to reach our goal of $200 million in annualized savings by the end of the year. Through the second quarter of 2013, we have achieved approximately $171 million of the targeted savings.” 

SECOND QUARTER 2013 FINANCIAL RESULTS 

Compared with Second Quarter of 2012 
·        Total revenue increased $14 million 
o        Taxable-equivalent net interest income of $586 million, up $42 million, or 7.7%, which included $30 million associated with Key’s third quarter 2012 branch and credit card portfolio acquisitions 
o        Noninterest income declined $28 million, or 6.1% primarily due to a gain on the early terminations of leveraged leases one year ago and a reduction in net gains (losses) from principal investing; noninterest income included $14 million associated with Key’s acquisitions noted above 
·        Net interest margin of 3.13%, up 7 basis points 
·        Continued average loan growth driven by 13.9% increase in commercial, financial and agricultural loans 
·        Average deposits increased $4.6 billion, or 7.6%, which included $2 billion of deposits from Key’s third quarter 2012 Western New York branch acquisition 
·        Noninterest expense up $18 million, which included $37 million associated with the efficiency initiative and $26 million associated with Key’s acquisitions noted above 
·        Net loan charge-offs decreased 41.6% to .34% of average total loans 
·        Maintained solid capital position with Tier 1 common equity of 11.25% 

Compared with First Quarter of 2013 
·        Total revenue relatively stable 
o        Taxable-equivalent net interest income down $3 million 
o        Noninterest income up $4 million 
·        Net interest margin down 11 basis points 
·        Average loans remained flat 
·        Average deposits increased $1.7 billion, or 2.7%, driven by growth in commercial balances 
·        Noninterest expense increased $30 million, which included a $22 million increase in costs associated with the efficiency initiative in the second quarter of 2013 
·        Net loan charge-offs decreased 8.2% 



Selected Financial Highlights
                           
                                 
dollars in millions, except per share data                    
Change 2Q13 vs.
 
     
2Q13
   
1Q13
   
2Q12
   
1Q13
   
2Q12
 
Income (loss) from continuing operations attributable to Key common shareholders $
193
  $
196
  $
217
   
(1.5)
%  
(11.1)
%
Income (loss) from continuing operations attributable to Key common shareholders per 
     common share — assuming dilution
 
.21
   
.21
   
.23
   
   
(8.7)
 
Return on average total assets from continuing operations  
.95
%  
.99
%  
1.10
%  
N/A
   
N/A
 
Tier 1 common equity (a)  
11.25
   
11.40
   
11.63
   
N/A
   
N/A
 
Book value at period end $
10.89
  $
10.89
  $
10.43
   
   
4.4
%
Net interest margin (TE) from continuing operations  
3.13
%  
3.24
%  
3.06
%  
N/A
   
N/A
 
                                 
                                 
 (a) The table entitled “GAAP to Non-GAAP Reconciliations” in the attached financial supplement presents the computations of certain financial measures related to “Tier 1 common equity.”  The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons.  
                                 
TE = Taxable Equivalent, N/A = Not Applicable                              
                                 
INCOME STATEMENT HIGHLIGHTS                              
                                 
Revenue                              
                                 
dollars in millions                    
Change 2Q13 vs.
 
     
2Q13
   
1Q13
   
2Q12
   
1Q13
   
2Q12
 
Net interest income (TE) $
586
  $
589
  $
544
   
(.5)
%  
7.7
%
Noninterest income  
429
   
425
   
457
   
.9
   
(6.1)
 
  Total revenue $
1,015
  $
1,014
  $
1,001
   
.1
%  
1.4
%
                                 
                                 
TE = Taxable Equivalent                              


Taxable-equivalent net interest income was $586 million for the second quarter of 2013, and the net interest margin was 3.13%.  These results compare to taxable-equivalent net interest income of $544 million and a net interest margin of 3.06% for the second quarter of 2012.  The increase in the net interest margin was primarily a result of a change in funding mix from the redemption of certain trust preferred securities, maturity of long-term debt, and maturity of higher-costing certificates of deposit over the past year. 

Compared to the first quarter of 2013, taxable-equivalent net interest income decreased by $3 million, and the net interest margin declined by 11 basis points.  The decrease in net interest income was primarily due to lower replacement yields on new loans and investments as compared to the yield on maturing loans and investments.  This decline was partially offset by an increase in average earning asset balances and a higher day count in the second quarter.  The decline in the net interest margin was largely attributable to a six basis point impact from lower loan yields and fees as well as a five basis point impact from higher levels of liquidity and securities. The net interest margin was also negatively impacted by approximately two basis points from the termination and maturity of $4.4 billion of interest rate swaps that were not replaced, as Key continues to increase its asset sensitivity to be better positioned for a rise in short-term interest rates. 










Noninterest Income
                               
                                   
dollars in millions                      
Change 2Q13 vs.
 
       
2Q13
   
1Q13
   
2Q12
   
1Q13
   
2Q12
 
Trust and investment services income   $
100
  $
95
  $
90
   
5.3
%  
11.1
%
Investment banking and debt placement fees    
84
   
79
   
73
   
6.3
   
15.1
 
Service charges on deposit accounts    
71
   
69
   
70
   
2.9
   
1.4
 
Operating lease income and other leasing gains    
19
   
23
   
58
   
(17.4)
   
(67.2)
 
Corporate services income    
43
   
45
   
44
   
(4.4)
   
(2.3)
 
Cards and payments income    
42
   
37
   
31
   
13.5
   
35.5
 
Corporate-owned life insurance income    
31
   
30
   
30
   
3.3
   
3.3
 
Consumer mortgage income    
6
   
7
   
9
   
(14.3)
   
(33.3)
 
Net gains (losses) from principal investing    
7
   
8
   
24
   
(12.5)
   
(70.8)
 
Other income    
26
   
32
   
28
   
(18.8)
   
(7.1)
 
  Total noninterest income   $
429
  $
425
  $
457
   
.9
%  
(6.1)
%
                                   
                                   


Key’s noninterest income was $429 million for the second quarter of 2013, compared to $457 million for the year-ago quarter.  Operating lease income and other leasing gains decreased $39 million primarily due to a $31 million gain on the early terminations of leveraged leases one year ago, and net gains (losses) from principal investing decreased by $17 million.  These decreases were partially offset by increases in investment banking and debt placement fees and cards and payments income of $11 million each, and trust and investment services income of $10 million. 

Compared to the first quarter of 2013, noninterest income increased by $4 million.  Trust and investment services income, investment banking and debt placement fees, and cards and payments income each increased $5 million. These increases in noninterest income were partially offset by declines in operating lease income and other leasing gains of $4 million and other income of $6 million. 
Noninterest Expense                                
                                   
dollars in millions                      
Change 2Q13 vs.
 
       
2Q13
   
1Q13
   
2Q12
   
1Q13
   
2Q12
 
Personnel expense   $
406
  $
391
  $
377
   
3.8
%  
7.7
%
Nonpersonnel expense    
305
   
290
   
316
   
5.2
   
(3.5)
 
  Total noninterest expense   $
711
  $
681
  $
693
   
4.4
%  
2.6
%
                                   
                                   


Key’s noninterest expense was $711 million for the second quarter of 2013, compared to $693 million for the same period last year.  Excluding the $37 million in expenses related to Key’s efficiency initiative and the $26 million in incremental costs associated with acquisitions, noninterest expense was down $45 million compared to the prior year.  Personnel expense increased $29 million due to an increase in severance expense primarily associated with Key’s efficiency initiative and higher incentive compensation expense accruals.  Nonpersonnel expense decreased $11 million from one year ago.  Business services and professional fees declined $14 million, and marketing expense and other real estate owned (OREO) expense each decreased $6 million.  These declines were partially offset by an increase in net occupancy of $10 million primarily due to charges related to the consolidation of 33 branches during the second quarter of 2013.   Intangible asset amortization on credit cards and other intangible asset amortization associated with the third quarter 2012 acquisitions of the credit card portfolio and the branches in Western New York also increased $9 million in total. 

Compared to the first quarter of 2013, noninterest expense increased by $30 million.  Personnel expense increased $15 million as severance expense was $9 million higher; annual merit and incentive compensation also contributed to the increase.  Nonpersonnel expense also increased $15 million from the first quarter of 2013.  Net occupancy increased $8 million primarily due to charges related to the consolidation of 33 branches during the second quarter of 2013.  Marketing expense also increased $5 million. 

BALANCE SHEET HIGHLIGHTS 

As of June 30, 2013, Key had total assets of $90.6 billion compared to $89.2 billion at March 31, 2013, and $86.5 billion at June 30, 2012. 
Average Loans                                
                                   
dollars in millions                    
Change 6-30-13 vs.
 
     
6-30-13
 
3-31-13
 
6-30-12
 
3-31-13
 
6-30-12
 
Commercial, financial and agricultural (a)   $
23,480
  $
23,317
  $
20,606
   
.7
%  
13.9
%
Other commercial loans    
13,290
   
13,493
   
14,055
   
(1.5)
   
(5.4)
 
Total home equity loans    
10,381
   
10,200
   
9,852
   
1.8
   
5.4
 
Other consumer loans    
5,545
   
5,616
   
4,933
   
(1.3)
   
12.4
 
  Total loans   $
52,696
  $
52,626
  $
49,446
   
.1
%  
6.6
%
                                   


(a)        Commercial, financial and agricultural average balance for the three months ended June 30, 2013 and March 31, 2013 includes $96 million and $91 million, respectively, of assets from commercial credit cards. 

Average loans were $52.7 billion for the second quarter of 2013, an increase of $3.3 billion compared to the second quarter of 2012.  Commercial, financial and agricultural loans grew by $2.9 billion over the year-ago quarter, with strong growth across Key’s business segments.  In addition, the third quarter 2012 credit card portfolio and Western New York branch acquisitions added $1 billion of mostly consumer loans.  This growth was partially offset by declines in the commercial real estate portfolio, the equipment lease portfolio, which included the early termination of certain leveraged leases in the exit portfolio in 2012, and run-off of consumer loans in the designated exit portfolio.   

Compared to the first quarter of 2013, average loans increased by $70 million.  This average loan growth was attributable to an increase in commercial, financial and agricultural loans and home equity loans, which benefitted from Key’s second quarter lending promotion.  This growth in loans was partially offset by a decrease in commercial real estate, commercial lease financing, and other consumer loans. 
Average Deposits                                
                                   
dollars in millions                      
Change 6-30-13 vs.
 
     
6-30-13
 
3-31-13
 
6-30-12
 
3-31-13
 
6-30-12
 
Non-time deposits (a)   $
57,691
  $
55,819
  $
50,801
   
3.4
%  
13.6
%
Certificates of deposits ($100,000 or more)    
2,975
   
2,911
   
3,858
   
2.2
   
(22.9)
 
Other time deposits    
4,202
   
4,451
   
5,645
   
(5.6)
   
(25.6)
 
  Total deposits   $
64,868
  $
63,181
  $
60,304
   
2.7
%  
7.6
%
                                   
Cost of total deposits (a)    
.26
%  
.29
%  
.47
%  
N/A
   
N/A
 
                                   
                                   
(a) Excludes deposits in foreign office.                                
                                   
N/A = Not Applicable                                


        Average deposits, excluding deposits in foreign office, totaled $64.9 billion for the second quarter of 2013, an increase of $4.6 billion compared to the year-ago quarter.  The growth reflects an increase in demand deposits of $2.7 billion and interest-bearing non-time deposits of $4.2 billion (including the impact of Key’s third quarter 2012 Western New York branch acquisition, which added $2 billion of mostly interest-bearing non-time deposits).  This deposit growth was partially offset by $2.3 billion of run-off from one year ago in certificates of deposit and other time deposits. 

Compared to the first quarter of 2013, average deposits, excluding deposits in foreign office, increased by $1.7 billion.  This deposit growth was primarily due to an increase in business demand and interest-bearing commercial deposits, reflecting deposits made by some of Key’s larger clients. 
ASSET QUALITY                                
                                 
dollars in millions                      
Change 2Q13 vs.
 
     
2Q13
   
1Q13
   
2Q12
   
1Q13
   
2Q12
 
Net loan charge-offs   $
45
  $
49
  $
77
   
(8.2)
%  
(41.6)
%
Net loan charge-offs to average total loans    
.34
%  
.38
%  
.63
%  
N/A
   
N/A
 
Nonperforming loans at period end (a)   $
652
  $
650
  $
657
   
.3
   
(.8)
 
Nonperforming assets at period end    
693
   
705
   
751
   
(1.7)
   
(7.7)
 
Allowance for loan and lease losses    
876
   
893
   
888
   
(1.9)
   
(1.4)
 
Allowance for loan and lease losses to nonperforming loans    
134.36
%  
137.38
%  
135.16
%  
N/A
   
N/A
 
Provision (credit) for loan and lease losses   $
28
  $
55
  $
21
   
(49.1)
%  
33.3
%
                                 
                                 
(a)  June 30, 2013 and March 31, 2013 amounts exclude $19 million and $22 million, respectively, of purchased credit impaired loans acquired in July 2012.
                                 
N/A = Not Applicable                                


Key’s provision for loan and lease losses was $28 million for the second quarter of 2013, compared to $55 million for the first quarter of 2013 and $21 million for the year-ago quarter.  The decline in the provision for loan and lease losses from the prior quarter reflects Key’s current asset quality measures and the quality of its new loan originations. 

Key’s allowance for loan and lease losses was $876 million, or 1.65% of total period-end loans at June 30, 2013, compared to 1.70% at March 31, 2013, and 1.79% at June 30, 2012. 

Net loan charge-offs for the second quarter of 2013 totaled $45 million, or .34% of average total loans.  These results compare to $49 million, or .38% for the first quarter of 2013, and $77 million, or .63% for the same period last year.   

At June 30, 2013, Key’s nonperforming loans totaled $652 million and represented 1.23% of period-end portfolio loans, compared to 1.24% at March 31, 2013 and 1.32% at June 30, 2012.  Nonperforming assets at June 30, 2013, totaled $693 million and represented 1.30% of period-end portfolio loans and OREO and other nonperforming assets, compared to 1.34% at March 31, 2013, and 1.51% at June 30, 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, 2013. 
Capital Ratios                  
                   
   
6-30-13
   
3-31-13
   
6-30-12
 
Tier 1 common equity (a), (b)  
11.25
%  
11.40
%  
11.63
%
Tier 1 risk-based capital (a)  
12.01
   
12.19
   
12.45
 
Total risk based capital (a)  
14.75
   
15.02
   
15.83
 
Tangible common equity to tangible assets (b)  
9.96
   
10.24
   
10.44
 
Leverage (a)  
11.21
   
11.36
   
11.35
 
                   


(a)        6-30-13 ratio is estimated. 

(b)        The table entitled “GAAP to Non-GAAP Reconciliations” in the attached financial supplement presents the computations of certain financial measures related to “tangible common equity” and “Tier 1 common equity.”  The table reconciles the GAAP performance measures to the corresponding non-GAAP measures, which provides a basis for period-to-period comparisons. 

As shown in the preceding table, at June 30, 2013, Key’s estimated Tier 1 common equity and Tier 1 risk-based capital ratios stood at 11.25% and 12.01%, respectively.  In addition, the tangible common equity ratio was 9.96% at June 30, 2013. 

On July 2, 2013 and July 9, 2013, the Federal Reserve and the OCC, respectively, approved a final rule that will implement the Basel III regulatory capital reforms and certain changes required by the Dodd-Frank Act. Consistent with the proposed rule published in August 2012, the final rule increases minimum requirements for both the quantity and quality of capital held by banking organizations and emphasizes Tier 1 common equity.  While the final rule becomes effective in January 2014, the mandatory compliance date for Key begins in January 2015 and is subject to transitional provisions extending to January 2019. Key’s estimated Tier 1 common equity as calculated under this final rule was 10.81% at June 30, 2013.  This exceeds the fully phased-in required minimum Tier 1 common equity (including capital conservation buffer) of 7.00%. 
Summary of Changes in Common Shares Outstanding                    
                                   
in thousands                      
Change 2Q13 vs.
 
       
2Q13
   
1Q13
   
2Q12
   
1Q13
   
2Q12
 
Shares outstanding at beginning of period    
922,581
   
925,769
   
956,102
   
(.3)
%  
(3.5)
%
Common shares repurchased    
(10,786)
   
(6,790)
   
(10,468)
   
58.9
   
3.0
 
Shares reissued (returned) under employee benefit plans    
1,088
   
3,602
   
(161)
   
(69.8)
   
N/M
 
  Shares outstanding at end of period    
912,883
   
922,581
   
945,473
   
(1.1)
%  
(3.4)
%
                                   
                                   
N/M = Not Meaningful                                


As previously reported and as authorized by Key’s Board of Directors and pursuant to Key’s 2013 capital plan submitted to and not objected to by the Federal Reserve, Key has authority to repurchase up to $426 million of its common shares.  Common share repurchases under the 2013 capital plan authorization are expected to be executed through the first quarter of 2014.   

The after-tax gain on the previously announced Victory divestiture is now expected to be lower than originally projected and in the range of $100 million to $115 million. The cash portion of this gain will be between $75 million and $90 million, and Key has received no objection from the Federal Reserve to use these cash proceeds for common share repurchases. 

During the second quarter of 2013, Key completed $112 million of common share repurchases on the open market under Key’s share repurchase 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.  For more detailed financial information pertaining to each business segment, see the tables at the end of this release.   
Major Business Segments                                
                                   
dollars in millions                      
Change 2Q13 vs.
 
       
2Q13
   
1Q13
   
2Q12
   
1Q13
   
2Q12
 
Revenue from continuing operations (TE)                                
Key Community Bank   $
555
  $
549
  $
537
   
1.1
%  
3.4
%
Key Corporate Bank    
376
   
379
   
371
   
(.8)
   
1.3
 
Other Segments    
86
   
83
   
94
   
3.6
   
...

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