KeyCorp Reports Third Quarter 2009 Results
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CLEVELAND, Oct. 21 /PRNewswire-FirstCall/ --
-- Net loss from continuing operations of $.50 per common share
-- Loan loss reserve increased to $2.5 billion, or 4.00% of total loans
-- Capital and liquidity positions remain strong; Tier 1 common equity
ratio of 7.63%
-- Sharpened focus on relationship businesses
-- $8.5 billion in new or renewed loans and commitments originated
KeyCorp (NYSE: KEY) today announced a third quarter net loss from continuing operations attributable to Key common shareholders of $422 million, or $.50 per common share. These results compare to a net loss from continuing operations attributable to Key common shareholders of $9 million, or $.02 per common share, for the third quarter of 2008.
The loss for the current quarter is largely the result of an increase in the provision for loan losses, write-downs of certain real estate related investments, higher costs associated with other real estate owned ("OREO"), and the write-off of certain intangible assets. During the third quarter, Key continued to increase its loan loss reserves by taking a $733 million provision for loan losses, which exceeded net charge-offs by $146 million. As of the end of the quarter, Key's allowance for loan losses was $2.5 billion, or 4.00% of total loans, up from $1.4 billion, or 1.90%, one year ago.
"While our results continue to be impacted by the difficult operating environment, we believe the aggressive actions we've taken to address credit quality, strengthen capital and liquidity, and reshape our business mix position us to meet the challenges posed by the current environment and to emerge as a more competitive company when the economy rebounds," said Chief Executive Officer Henry L. Meyer III. "Further, we are encouraged by the continuation of deposit growth and the improvement in our net interest margin."
During the third quarter, Key exchanged common shares for retail capital securities, raising $505 million of additional Tier 1 common equity. This completed a series of successful capital raises and exchanges that generated approximately $2.4 billion of new Tier 1 common equity to bolster the company's overall capital. At September 30, 2009, Key's estimated Tier 1 risk-based capital and Tier 1 common equity ratios were 12.61% and 7.63%, respectively.
Key's average deposits grew by $3.6 billion, or 6%, compared to the year-ago quarter, and the company originated approximately $8.5 billion in new or renewed loans and commitments to consumers and businesses during the quarter, and $24.5 billion during the first nine months of the year. As part of a multi-year investment in its 14-state branch network, the company has opened 32 new branches (including relocations) in 8 markets in 2009, and expects to open an additional 6 branches by the end of the year. Also, Key will have completed renovations on approximately 160 branches over the past two years by the end of 2009.
Meyer added: "We are continuing to strengthen our business mix and to concentrate on the areas in which we believe we can be the most competitive. Earlier this month, we announced our decision to exit the government-guaranteed education lending business, following earlier actions taken to cease private student lending. Additionally, within the equipment leasing business, we have decided to cease conducting business in both the commercial vehicle and office leasing markets. These actions exemplify our disciplined focus on our core relationship businesses."
As a result of the decision to exit the government-guaranteed education lending business, Key has applied discontinued operations accounting to the education lending business for all periods presented in this release. In addition, during the third quarter of 2009, the company recorded a $45 million charge to write-off intangible assets, other than goodwill, associated with the decision to cease lending in certain equipment leasing markets.
The following table shows Key's continuing and discontinued operating results for comparative quarters and for the nine-month periods ended September 30, 2009 and 2008.
Results of Operations
Three months ended Nine months ended
------------------ -----------------
in millions, except
per share amounts 9-30-09 6-30-09 9-30-08 9-30-09 9-30-08
-------------------------------------------------------------------------
Summary of operations
---------------------
Income (loss) from
continuing operations
attributable to Key $(381) $(230) $3 $(1,070) $(801)
Income (loss) from
discontinued operations,
net of taxes (a) (16) 4 (39) (41) (143)
--- - --- --- ----
Net loss attributable to Key $(397) $(226) $(36) $(1,111) $(944)
===== ===== ==== ======= =====
Income (loss) from continuing
operations attributable
to Key $(381) $(230) $3 $(1,070) $(801)
Less: Dividends on Series A
Preferred Stock 7 15 12 34 12
Noncash deemed dividend
- common shares
exchanged for Series A
Preferred Stock -- 114 -- 114 --
Cash dividends on
Series B Preferred
Stock 31 31 -- 94 --
Amortization of
discount on Series B
Preferred Stock 3 4 -- 11 --
--- --- --- --- ---
Loss from continuing operations
attributable to Key common
shareholders (422) (394) (9) (1,323) (813)
Income (loss) from discontinued
operations, net of taxes (a) (16) 4 (39) (41) (143)
--- --- --- --- ----
Net loss attributable to Key
common shareholders $(438) $(390) $(48) $(1,364) $(956)
===== ===== ==== ======= =====
Per common share - assuming
dilution
---------------------------
Loss from continuing
operations attributable to
Key common shareholders $(.50) $(.68) $(.02) $(2.07) $(1.87)
Income (loss) from discontinued
operations, net of taxes (a) (.02) .01 (.08) (.06) (.33)
---- --- ---- ---- ----
Net loss attributable to Key
common shareholders (b) $(.52) $(.68) $(.10) $(2.14) $(2.19)
===== ===== ===== ====== ======
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(a) In September 2009, management made the decision to discontinue the
education lending business conducted through Key Education Resources,
the education payment and financing unit of KeyBank National
Association. In April 2009, management made the decision to curtail
the operations of Austin Capital Management, Ltd., an investment
subsidiary that specializes in managing hedge fund investments for
its institutional customer base. As a result of these decisions,
Key has accounted for these businesses as discontinued operations.
Included in the loss from discontinued operations for the nine-month
period ended September 30, 2009, is a $23 million after tax, or $.05
per common share, charge for intangible assets impairment related to
Austin Capital Management recorded during the first quarter.
(b) Earnings per share may not foot due to rounding.
As shown in the following table, the comparability of Key's earnings for the current, prior and year-ago quarters is affected by several significant items.
Significant Items Affecting the Comparability of Earnings
Third Quarter 2009 Second Quarter 2009
-------------------------- --------------------------
in millions,
except per
share Pre-tax After-tax Impact Pre-tax After-tax Impact
amounts Amount Amount on EPS Amount Amount on EPS
-------------------------------------------------------------------------
Provision
for loan
losses
in excess
of net
charge-offs $(146) $(91) $(.11) $(321) $(201) $(.35)
Realized
and
unrealized
losses
on loan and
securities
portfolios
held for
sale or
trading (58) (37) (.04) (23) (15) (.03)
Noncash
charge for
intangible
assets
impairment (45) (28) (.03) - - -
Provision
for
losses on
lending-
related
commitments (29) (18) (.02) (11) (7) (.01)
Gain
(loss)
related to
exchange of
common
shares for
capital
securities (17) (11) (.01) 95 59 .10
Noncash
deemed
dividend
- common
shares
exchanged
for
Series A
Preferred
Stock - - - - - (.20) (a)
FDIC
special
assessment - - - (44) (27) (.05)
Net gains
from
repositioning
of securities
portfolio - - - 125 78 .13
Gain from
sale of
Key's
claim
associated
with the
Lehman
Brothers'
bankruptcy - - - 32 20 .03
Charges
related to
leveraged
lease
tax
litigation - - - - - -
Reversal of
Honsador
litigation
reserve - - - - - -
Third Quarter 2008
------------------
in millions,
except per Pre-tax After-tax Impact
share amounts Amount Amount on EPS
-------------------------------------------------
Provision for
loan losses in
excess of net
charge-offs $(103) $(64) $(.13)
Realized and
unrealized losses
on loan and
securities
portfolios
held for sale
or trading (88) (b) (56) (b) (.11)
Noncash charge
for intangible
assets impairment - - -
Provision for
losses on
lending-
related
commitments (8) (5) (.01)
Gain (loss)
related to
exchange of
common shares
for capital
securities - - -
Noncash deemed
dividend
- common shares
exchanged for
Series A
Preferred Stock - - -
FDIC special
Assessment - - -
Net gains from
repositioning
of securities
portfolio - - -
Gain from sale
of Key's claim
associated with
the Lehman
Brothers'
bankruptcy - - -
Charges related
to leveraged
lease tax
litigation - (30) (.06)
Reversal of
Honsador
litigation
reserve 23 14 .03
-------------------------------------------------------------------------
(a) The deemed dividend related to the exchange of Key common shares
for Series A Preferred Stock is subtracted from earnings to derive
the numerator used in the calculation of per share results; it is
not recorded as a reduction to equity.
(b) Includes $54 million ($33 million after tax) of derivative-related
charges recorded as a result of market disruption caused by the
failure of Lehman Brothers, and $31 million ($19 million after tax)
of realized and unrealized losses from the residential properties
segment of the construction loan portfolio.
EPS = Earnings per common share
SUMMARY OF CONTINUING OPERATIONS
Taxable-equivalent net interest income was $599 million for the third quarter of 2009, and the net interest margin was 2.80%. These results compare to taxable-equivalent net interest income of $684 million and a net interest margin of 3.17% for the third quarter of 2008. During the past twelve months, the net interest margin has remained under pressure as the decrease in the federal funds target rate has resulted in a larger decrease in the interest rates on earning assets than that experienced for interest-bearing liabilities. Competition for deposits and a shift in deposit mix to higher costing, longer-term certificates of deposit have also contributed to the lower net interest margin. During the same period, earning asset yields have been compressed as a result of the higher levels of nonperforming loans. Additionally, during the third quarter of 2009, Key terminated certain leveraged lease financing arrangements, which reduced net interest income by $14 million and lowered the net interest margin by approximately 7 basis points.
Compared to the second quarter of 2009, taxable-equivalent net interest income increased by $24 million, and the net interest margin rose by 10 basis points. The improvement reflects the impact of repricing maturing certificates of deposit at lower market rates, new or renewed loans with more favorable interest rate spreads, and increasing the securities available-for-sale portfolio using excess cash flows from loan repayments and deposit flows. The net interest margin for the second quarter was also affected by the termination of certain leveraged lease financing arrangements, which reduced net interest income by $16 million and lowered the net interest margin by approximately 7 basis points.
Key's noninterest income was $382 million for the third quarter of 2009, compared to $390 million for the year-ago quarter. Both the third quarter of 2009 and 2008 were impacted by market related conditions. In the third quarter of 2009, the company recorded a $26 million loss resulting from changes in the fair values of certain investments made by the Funds Management unit within the Real Estate Capital and Corporate Banking Services line of business, a $20 million loss resulting from changes in the fair values of certain commercial mortgage-backed securities held in the trading portfolio, and a $12 million charge resulting from an increase in the reserve for losses related to customer derivatives. In addition, the company incurred a $17 million loss associated with the exchange of common shares for capital securities in the third quarter of 2009. Noninterest income for the third quarter of 2008 includes $54 million of derivative-related charges recorded as a result of market disruption caused by the failure of Lehman Brothers and $31 million of realized and unrealized losses from the residential properties segment of the construction loan portfolio.
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
in millions 3Q09 2Q09 1Q09 4Q08 3Q08
-----------------------------------------------------------------------
Trust and investment services income $113 $119 $110 $131 $125
Service charges on deposit accounts 83 83 82 90 94
Operating lease income 55 59 61 64 69
Letter of credit and loan fees 46 44 38 42 53
Corporate-owned life insurance income 26 25 27 33 28
Electronic banking fees 27 27 24 25 27
Insurance income 18 16 18 15 15
Investment banking and capital markets
income (loss) (26) 14 17 5 (26)
Net losses from principal investing (6) (6) (72) (37) (14)
-----------------------------------------------------------------------
Compared to the second quarter of 2009, noninterest income decreased by $324 million. The decrease was due largely to three transactions recorded during the second quarter. These transactions included $125 million of net gains recorded in connection with the repositioning of the securities portfolio; a $95 million gain related to the exchange of common shares for capital securities, compared to the $17 million loss recorded in the current quarter; and a $32 million gain from the sale of Key's claim associated with the Lehman Brothers' bankruptcy. During the third quarter, Key also experienced a $40 million decrease in results from investment banking and capital markets activities, due primarily to the items discussed above, and a $14 million decrease in net gains on sales of leased equipment.
Key's noninterest expense was $901 million for the third quarter of 2009, compared to $740 million for the same period last year. Personnel expense rose by $6 million, due largely to higher costs associated with employee benefits, primarily pension expense. This increase was offset in part by a reduction in salaries expense caused by a 9% decline in the number of average full-time equivalent employees. Nonpersonnel expense increased by $155 million, reflecting increases of $46 million resulting from the write-down or sale of OREO, $37 million in the FDIC deposit insurance assessment and $21 million in the provision for losses on lending-related commitments. Also contributing to the increase in noninterest expense was the $45 million write-off of intangible assets, other than goodwill, recorded during the third quarter of 2009 as a result of Key's decision to cease lending in certain equipment leasing markets.
Compared to the second quarter of 2009, noninterest expense increased by $46 million as a result of the $45 million write-off of intangible assets associated with Key's equipment leasing business during the third quarter of 2009. Other changes in expense components between the third and second quarters of 2009 offset each other, with the FDIC deposit insurance assessment decreasing by $30 million and OREO expense increasing by $36 million.
ASSET QUALITY
Key's provision for loan losses was $733 million for the third quarter of 2009, compared to $336 million for the year-ago quarter and $823 million for the second quarter of 2009. Credit migration, particularly in the commercial real estate portfolio, continues to result in higher levels of net charge-offs and nonperforming loans, and increased reserves. Key's provision for loan losses for the third quarter of 2009 exceeded net loan charge-offs by $146 million. As a result, Key's allowance for loan losses rose to $2.5 billion, or 4.00% of total loans, at September 30, 2009, up from $2.3 billion, or 3.48%, at June 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
dollars in millions 3Q09 2Q09 1Q09 4Q08 3Q08
-------------------------------------------------------------------------
Net loan charge-offs $587 $502 $460 $309 $233
Net loan charge-offs to average
loans 3.59% 2.93% 2.60% 1.67% 1.28%
Allowance for loan losses $2,485 $2,339 $2,016 $1,629 $1,390
Allowance for credit losses (a) 2,579 2,404 2,070 1,683 1,449
Allowance for loan losses to
period-end loans 4.00% 3.48% 2.88% 2.24% 1.90%
Allowance for credit losses to
period-end loans 4.15 3.58 2.96 2.31 1.99
Allowance for loan losses to
nonperforming loans 108.52 107.05 116.20 133.42 144.19
Allowance for credit losses to
nonperforming loans 112.62 110.02 119.31 137.84 150.31
Nonperforming loans at
period end $2,290 $2,185 $1,735 $1,221 $964
Nonperforming assets at
period end 2,799 2,548 1,994 1,460 1,236
Nonperforming loans to period-end
portfolio loans 3.68% 3.25% 2.48% 1.68% 1.32%
Nonperforming assets to period-end
portfolio loans plus OREO and
other nonperforming assets 4.46 3.77 2.84 2.00 1.69
-------------------------------------------------------------------------
(a) Includes the allowance for loan losses plus the liability for credit
losses on lending-related commitments.
Net loan charge-offs for the quarter totaled $587 million, or 3.59% of average loans. These results compare to $233 million, or 1.28%, for the same period last year and $502 million, or 2.93%, 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
dollars in millions 3Q09 2Q09 1Q09 4Q08 3Q08
---------------------------------------------------------------------
Commercial, financial and
agricultural $168 $168 $232 $119 $62
Real estate - commercial mortgage 81 87 21 43 20
Real estate - construction 216 133 104 49 79
Commercial lease financing 27 22 18 21 19
-- -- -- -- --
Total commercial loans 492 410 375 232 180
Home equity - Community Banking 25 24 17 14 9
Home equity - National Banking 20 18 15 17 12
Marine 25 29 32 25 16
Other 25 21 21 21 16
-- -- -- -- --
Total consumer loans 95 92 85 77 53
-- -- -- -- --
Total net loan charge-offs $587 $502 $460 $309 $233
==== ==== ==== ==== ====
Net loan charge-offs to average
loans from continuing operations 3.59% 2.93% 2.60% 1.67% 1.28%
Net loan charge-offs from
discontinued operations -
education lending business $38 $37 $32 $33 $40
---------------------------------------------------------------------
Compared to the second quarter of 2009, net loan charge-offs in the commercial loan portfolio increased by $82 million, as elevated net charge-offs continue on commercial real estate loans. The Real Estate Capital and Corporate Banking Services line of business within the National Banking group accounted for most of the growth in net charge-offs in the commercial real estate portfolio. The level of net charge-offs in the consumer portfolio rose by $3 million. As shown in the table on page 7, Key's exit loan portfolio accounted for $137 million, or 23%, of Key's total net loan charge-offs for the third quarter of 2009. Net charge-offs in the exit portfolio decreased by $11 million from the second quarter of 2009.
At September 30, 2009, Key's nonperforming loans totaled $2.3 billion and represented 3.68% of period-end portfolio loans, compared to 3.25% at June 30, 2009, and 1.32% at September 30, 2008. Nonperforming assets at September 30, 2009, totaled $2.8 billion and represented 4.46% of portfolio loans, OREO and other nonperforming assets, compared to 3.77% at June 30, 2009, and 1.69% at September 30, 2008. The following table illustrates the trend in Key's nonperforming assets by loan type over the past five quarters.
Nonperforming Assets from Continuing Operations
dollars in millions 3Q09 2Q09 1Q09 4Q08 3Q08
-------------------------------------------------------------------------
Commercial, financial and
agricultural $679 $700 $595 $415 $309
Real estate - commercial mortgage 566 454 310 128 119
Real estate - construction 702 716 546 436 334
Commercial lease financing 131 122 109 81 55
Total consumer loans 212 193 175 161 147
--- --- --- --- ---
Total nonperforming loans 2,290 2,185 1,735 1,221 964
Nonperforming loans held for sale 304 145 72 90 169
OREO and other nonperforming
assets 205 218 187 149 103
--- --- --- --- ---
Total nonperforming assets $2,799 $2,548 $1,994 $1,460 $1,236
====== ====== ====== ====== ======
Nonperforming loans to period-end
portfolio loans 3.68% 3.25% 2.48% 1.68% 1.32%
Nonperforming assets to period-end
portfolio loans, plus OREO and
other nonperforming assets 4.46 3.77 2.84 2.00 1.69
As shown in the preceding table, nonperforming assets rose during the third quarter of 2009, but at a much slower pace than that experienced in recent quarters. Most of the increase in nonperforming loans was attributable to the commercial real estate portfolio and was caused in part by the continuation of deteriorating market conditions in the income properties segment. The increase in nonperforming loans held for sale reflects the actions Key is taking to aggressively reduce its exposure in the commercial real estate and institutional portfolios through the sale of selected assets. In conjunction with these efforts, Key transferred $193 million of loans ($248 million, net of $55 million in net charge-offs) from the held-to-maturity loan portfolio to held-for-sale status during the third quarter of 2009, and has contracted to sell most of these loans by the end of October. As shown in the following table, Key's exit loan portfolio accounted for $695 million, or 25%, of Key's total nonperforming assets at September 30, 2009, compared to $747 million, or 29%, at June 30, 2009.
The composition of Key's exit loan portfolio at September 30, 2009, and June 30, 2009, the net charge-offs recorded on this portfolio for the third and second quarters of 2009, and the nonperforming status of these loans at September 30, 2009, and June 30, 2009, are shown in the following table.
Exit Loan Portfolio from Continuing Operations
Balance on
Balance Change Net Loan Nonperforming
Outstanding 9-30-09 Charge-offs Status
--------------- vs. ----------- ---------------
in millions 9-30-09 6-30-09 6-30-09 3Q09 2Q09 9-30-09 6-30-09
-------------------------------------------------------------------------
Residential
properties
- homebuilder $518 $614 $(96) $33 $62 $260 $298
Residential
properties held
for sale 62 65 (3) -- -- 62 65
--- --- --- --- --- --- ---
Total residential
properties 580 679 (99) 33 62 322 363
Marine and RV floor
plan 511 696 (185) 25 8 142 154
--- --- --- --- --- --- ---
Commercial lease
Financing (a) 3,304 3,824 (520) 30 29 194 190
Total commercial
loans 4,395 5,199 (804) 88 99 658 707
Home equity -
National Banking 880 934 (54) 20 18 21 20
Marine 2,943 3,095 (152) 25 29 15 19
RV and other
consumer 231 245 (14) 4 2 1 1
--- --- --- --- --- --- ---
Total consumer loans 4,054 4,274 (220) 49 49 37 40
----- ----- --- --- --- --- ---
Total exit loans in
loan portfolio $8,449 $9,473 $(1,024) $137 $148 $695 $747
====== ====== ===== ==== ==== ==== ====
Discontinued
operations --
education lending
business $3,912 $3,784 $128 $38 $37 $11 $3
-------------------------------------------------------------------------
(a) Includes the business aviation, commercial vehicle, office products,
construction and industrial, and Canadian lease financing portfolios; and
all remaining balances related to lease in, lease out; sale in, sale out;
service contract leases and qualified technological equipment leases.
Key's allowance for loan losses was $2.5 billion, or 4.00% of loans outstanding, at September 30, 2009, compared to $2.3 billion, or 3.48%, at June 30, 2009, and $1.4 billion, or 1.90%, at September 30, 2008. The company has continued to increase its allowance for loan losses as the current credit cycle progresses, and at September 30, 2009, had a coverage ratio of 109% of nonperforming loans.
CAPITAL
Key's risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at September 30, 2009.
Capital Ratios
9-30-09 6-30-09 3-31-09 12-31-08 9-30-08
-------------------------------------------------------------------------
Tier 1 common equity (a) 7.63% 7.36% 5.62% 5.62% 5.58%
Tier 1 risk-based capital (a) 12.61 12.57 11.22 10.92 8.55
Total risk-based capital (a) 16.75 16.67 15.18 14.82 12.40
Tangible Key shareholders'
equity to tangible assets 10.41 10.16 9.23 8.92 6.95
Tangible common equity to
tangible assets 7.58 7.35 6.06 5.95 6.29
-------------------------------------------------------------------------
(a) 9-30-09 ratio is estimated.
In an effort to further enhance its Tier 1 common equity, on July 8, 2009, Key commenced an SEC-registered offer to exchange Key common shares for certain capital (i.e., retail trust preferred) securities. This exchange offer, which expired on August 4, 2009, generated approximately $505 million of additional Tier 1 common equity. This completes a series of successful capital raises and exchanges that generated approximately $2.4 billion of new Tier I common equity to bolster the company's overall capital and to respond to the SCAP initiated by the U.S. Treasury Department and the federal banking regulators. As shown in the preceding table, at September 30, 2009, Key had a Tier 1 risk-based capital ratio of 12.61%, a Tier 1 common equity ratio of 7.63% and a tangible common equity ratio of 7.58%.
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
in thousands 3Q09 2Q09 1Q09 4Q08 3Q08
-------------------------------------------------------------------------
Shares outstanding at
beginning of period 797,246 498,573 495,002 494,765 485,662
Common shares exchanged
for capital securities 81,278 46,338 -- -- --
Common shares exchanged
for Series A Preferred Stock -- 46,602 -- -- --
Common shares issued -- 205,439 -- -- 7,066
Shares reissued under
employee benefit plans 35 294 3,571 237 2,037
-- --- ----- --- -----
Shares outstanding at end
of period 878,559 797,246 498,573 495,002 494,765
======= ======= ======= ======= =======
-------------------------------------------------------------------------
During the third quarter of 2009, Key made a $31 million cash dividend payment to the U.S. Treasury Department. This is the third of such quarterly payments that Key has made after having raised $2.5 billion of additional capital during the fourth quarter of 2008 as a participant in the U.S. Treasury's Capital Purchase Program.
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." 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
Percent change
3Q09 vs.
--------------
dollars in millions 3Q09 2Q09 3Q08 2Q09 3Q08
-------------------------------------------------------------------------
Revenue from continuing
operations (TE)
-----------------------
Community Banking $618 $593 $651 4.2% (5.1)%
National Banking (a) 461 514 460 (10.3) .2
Other Segments (b) (56) 183 (9) N/M (522.2)
--- --- -- ---- ------
Total Segments 1,023 1,290 1,102 (20.7) (7.2)
Reconciling Items (c) (42) (9) (28) (366.7) (50.0)
--- --- --- ------ -----
Total $981 $1,281 $1,074 (23.4)% (8.7)%
==== ====== ======
Income (loss) from continuing
operations attributable to Key
-------------------------------
Community Banking $(7) $(54) $98 87.0% N/M
National Banking (a) (352) (290) (90) (21.4) (291.1)%
Other Segments (b) (28) 112 8 N/M N/M
--- --- --- ---- ----
Total Segments (387) (232) 16 (66.8) N/M
Reconciling Items (c) 6 2 (13) 200.0 N/M
--- --- --- ----- ----
Total $(381) $(230) $3 (65.7)% N/M
===== ===== ====
-------------------------------------------------------------------------
(a) National Banking's results for the third quarter of 2009 include a
$45 million ($28 million after tax) write-off of intangible assets,
other than goodwill, resulting from Key's decision to cease lending
in certain equipment leasing markets. For the third quarter of
2008, National Banking's results include $54 million ($33 million
after tax) of derivative-related charges recorded as a result of
market disruption caused by the failure of Lehman Brothers, and
$31 million ($19 million after tax) of realized and unrealized
losses from the residential properties segment of the construction
loan portfolio.
(b) Other Segments' results for the third quarter of 2009 include a
$17 million ($11 million after tax) loss related to the exchange of
Key common shares for capital securities. For the second quarter
of 2009, Other Segments' results include net gains of $125 million
($78 million after tax) recorded in connection with the
repositioning of the securities portfolio and a $95 million
($59 million after tax) gain related to the exchange of Key common
shares for capital securities. During the third quarter of 2008,
Other Segments' results include a $23 million ($14 million after
tax) credit, representing the reversal of the remaining reserve
associated with the previously disclosed Honsador litigation,
which was settled in September 2008.
(c) Reconciling Items for the second quarter of 2009 include a
$32 million ($20 million after tax) gain from the sale of Key's
claim associated with the Lehman Brothers' bankruptcy. For the
third quarter of 2008, Reconciling Items includes a charge of
$30 million to income taxes for the interest cost associated with
the previously disclosed leveraged lease tax litigation.
TE = Taxable Equivalent, N/M = Not Meaningful
Community Banking
Percent change
3Q09 vs.
--------------
dollars in millions 3Q09 2Q09 3Q08 2Q09 3Q08
-------------------------------------------------------------------------
Summary of operations
Net interest income (TE) $419 $398 $438 5.3% (4.3)%
Noninterest income 199 195 213 2.1 (6.6)
--- --- --- --- ----
Total revenue (TE) 618 593 651 4.2 (5.1)
Provision for loan losses 143 187 56 (23.5) 155.4
Noninterest expense 486 492 438 (1.2) 11.0%
--- --- --- ---- ----
Income (loss) before income
taxes (TE) (11) (86) 157 87.2 N/M
Allocated income taxes and TE
adjustments (4) (32) 59 87.5 N/M
-- --- -- ---- ----
Net income (loss) attributable
to Key $(7) $(54) $98 87.0% N/M
=== ==== ===
Average balances
Loans and leases $27,410 $28,237 $28,874 (2.9)% (5.1)%
Total assets 30,304 31,168 31,896 (2.8) (5.0)
Deposits 52,954 52,689 50,378 .5 5.1
Assets under management at
period end $17,090 $15,815 $18,278 8.1% (6.5)%
-------------------------------------------------------------------------
TE = Taxable Equivalent, N/M = Not Meaningful
Percent change
Additional Community Banking Data 3Q09 vs.
--------------
dollars in millions 3Q09 2Q09 3Q08 2Q09 3Q08
-------------------------------------------------------------------------
Average deposits outstanding
NOW and money market deposit
accounts $17,375 $17,361 $19,507 .1% (10.9)%
Savings deposits 1,776 1,785 1,752 (.5) 1.4
Certificates of deposit
($100,000 or more) 8,884 8,974 6,875 (1.0) 29.2
Other time deposits 14,705 14,898 13,103 (1.3) 12.2
Deposits in foreign office 477 548 1,193 (13.0) (60.0)
Noninterest-bearing deposits 9,737 9,123 7,948 6.7 22.5
----- ----- ----- --- ----
Total deposits $52,954 $52,689 $50,378 .5% 5.1%
======= ======= =======
-------------------------------------------------------------------------
Home equity loans
Average balance $10,188 $10,287 $9,887
Weighted-average loan-to-value
ratio (at date of origination) 70% 70% 70%
Percent first lien positions 53 53 54
-----------------------------------------------------------
Other data
Branches 1,003 993 986
Automated teller machines 1,492 1,485 1,479
-----------------------------------------------------------
Community Banking Summary of Operations
Community Banking recorded a net loss attributable to Key of $7 million for the third quarter of 2009, compared to net income attributable to Key of $98 million for the year-ago quarter. Increases in the provision for loan losses and noninterest expense, coupled with decreases in net interest income and noninterest income, caused the decline.
Taxable-equivalent net interest income declined by $19 million, or 4%, from the third quarter of 2008, due primarily to a decrease in average earning assets. Average deposits increased by $2.6 billion, or 5%, reflecting strong growth in noninterest-bearing deposits. The composition and value of deposits have been impacted by the declining interest rate environment and a shift from money market deposit accounts into higher-costing, longer-term certificates of deposit, reflecting consumer preferences.
Noninterest income decreased by $14 million, or 7%, from the year-ago quarter, due largely to a decline in service charges on deposit accounts resulting from changing client behavior. Also contributing to lower noninterest income was a reduction in investment banking and capital markets income, due primarily to a decline in derivatives trading volume and an increase in the reserve for losses related to customer derivatives. These reductions were partially offset by higher mortgage loan sale gains.
The provision for loan losses rose by $87 million compared to the third quarter of 2008, reflecting a $24 million increase in net loan charge-offs, primarily from the home equity and consumer installment loan portfolios. Community Banking's provision for loan losses for the third quarter of 2009 exceeded its net loan charge-offs by $49 million, as the company continued to increase reserves in light of the challenging credit conditions brought on by a weak economy.
Noninterest expense grew by $48 million, or 11%, from the year-ago quarter, due largely to a higher FDIC deposit insurance assessment, and increases in both internally allocated overhead and marketing expense. The adverse effect of these factors was offset in part by lower personnel expense, reflecting a reduction in salaries expense caused by a decrease in the number of average full-time equivalent employees, and lower incentive compensation accruals.
National Banking
Percent change
3Q09 vs.
--------------
dollars in millions 3Q09 2Q09 3Q08 2Q09 3Q08
-------------------------------------------------------------------------
Summary of operations
Net interest income (TE) $267 $258 $308 3.5% (13.3)%
Noninterest income 194 256 152(a) (24.2) 27.6
--- --- --- ----- ----
Total revenue (TE) 461 514 460 (10.3) .2
Provision for loan losses 593 636 279 (6.8) 112.5
Noninterest expense 434(a) 344 322 26.2 34.8
--- --- --- ---- ----
Loss from continuing
operations before income
taxes (TE) (566) (466) (141) (21.5) (301.4)
Allocated income taxes and
TE adjustments (213) (175) (51) (21.7) (317.6)
---- ---- --- ----- ------
Loss from continuing
operations (353) (291) (90) (21.3) (292.2)
Income (loss) from
discontinued operations,
net of taxes (16) 4 (39) N/M 59.0
--- -- --- ---- ----
Net loss (369) (287) (129) (28.6) (186.0)
Less: Net loss attributable
to noncontrolling interests (1) (1) -- -- N/M
-- -- --- --- ---
Net loss attributable to Key $(368) $(286) $(129) (28.7) (185.3)
===== ===== =====
Loss from continuing
operations attributable
to Key $(352) $(290) $(90) (21.4)% (291.1)%
Average balances
Loans and leases $37,229 $40,271 $43,419 (7.6)% (14.3)%
Loans held for sale 469 466 1,495 .6 (68.6)
Total assets 42,479 46,640 52,037 (8.9) (18.4)
Deposits 13,435 13,141 12,304 2.2 9.2
Assets under management at
period end $49,055 $47,567 $58,398 3.1% (16.0)%
-------------------------------------------------------------------------
(a) National Banking's results for the third quarter of 2009 include a
$45 million ($28 million after tax) write-off of intangible assets,
other than goodwill, resulting from Key's decision to cease lending
in certain equipment leasing markets. For the third quarter of
2008, National Banking's results include $54 million ($33 million
after tax) of derivative-related charges recorded as a result of
market disruption caused by the failure of Lehman Brothers, and
$31 million ($19 million after tax) of realized and unrealized
losses from the residential properties segment of the construction
loan portfolio.
TE = Taxable Equivalent, N/M = Not Meaningful
National Banking Summary of Continuing Operations
National Banking recorded a loss from continuing operations attributable to Key of $352 million for the third quarter of 2009, compared to $90 million for the same period one year ago. A substantially higher provision for loan losses, lower net interest income and an increase in noninterest expense were offset in part by an increase in noninterest income.
Taxable-equivalent net interest income decreased by $41 million, or 13%, from the third quarter of 2008, due primarily to a decrease in average earning assets and a higher level of nonperforming loans, offset in part by more favorable deposit spreads and an increase in average deposits. Average earning assets decreased by $7.9 billion, or 17%, from the year-ago quarter, reflecting reductions in the commercial and held-for-sale loan portfolios. Average deposits rose by $1.1 billion, or 9%, as growth in NOW accounts and noninterest-bearing deposits more than offset a decline in money market deposit accounts.
Noninterest income rose by $42 million, or 28%, from the third quarter of 2008. Both the third quarter of 2009 and 2008 were impacted by market-related conditions. In the third quarter of 2009, National Banking recorded a $26 million loss resulting from changes in the fair values of certain investments made by the Funds Management unit within the Real Estate Capital and Corporate Banking Services line of business, a $20 million loss resulting from changes in the fair values of certain commercial mortgage-backed securities held in the trading portfolio, and an $8 million charge resulting from an increase in the reserve for losses related to customer derivatives. Noninterest income for the third quarter of 2008 includes $54 million of derivative-related charges recorded as a result of market disruption caused by the failure of Lehman Brothers, and $31 million of realized and unrealized losses from the residential properties segment of the construction loan portfolio. The improvement in noninterest income compared to the third quarter of 2008 also reflects a $16 million increase in net gains on sales of leased equipment.
The provision for loan losses rose by $314 million from the year-ago quarter. National Banking's provision for loan losses for the third quarter of 2009 exceeded its net loan charge-offs by $100 million as the company continued to increase reserves in a weak economy.
Noninterest expense grew by $112 million, or 35%, from the third quarter of 2008, reflecting higher expenses associated with the write-down or sale of OREO, and the $45 million write-off of intangible assets, other than goodwill, recorded during the current quarter as a result of Key's decision to cease conducting business in certain equipment leasing markets. Also contributing to the growth in noninterest expense were increases in the provision for losses on lending-related commitments and a variety of other miscellaneous expense components. The adverse effect of these factors was offset in part by lower personnel expense, reflecting a reduction in salaries expense caused by a decrease in the number of average full-time equivalent employees, and a decline in severance costs.
Earlier this month, management announced its decision to discontinue the education lending business and to focus on the growing demand from schools for integrated, simplified billing, payment and cash management solutions. The Consumer Finance line of business will continue to service existing loans in this portfolio and to originate education loans through December 4, 2009. In April 2009, Key made the strategic decision to curtail the operations of Austin Capital Management, Ltd., an investment subsidiary that specializes in managing hedge fund investments for its institutional customer base. As a result of these decisions, Key has applied discontinued operations accounting to these businesses.
Other Segments
Other Segments consist of Corporate Treasury and Key's Principal Investing unit. These segments generated a net loss attributable to Key of $28 million for the third quarter of 2009, compared to net income attributable to Key of $8 million for the same period last year. These results reflect a $17 million loss related to the exchange of Key common shares for capital securities during the current quarter. Additionally, Key incurred $11 million of expense in the third quarter of 2009, compared to income of $8 million in the year-ago quarter as a result of the volatility associated with hedge accounting applied to debt instruments.
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.
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.
Through its Victory Capital Management unit, Institutional and Capital Markets 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.
Consumer Finance provides government-guaranteed education loans to students and their parents, and processes tuition payments for private schools. Through its Commercial Floor Plan Lending unit, this line of business also finances inventory for automobile dealers. In October 2008, Key exited retail and floor-plan lending for marine and recreational vehicle products, and began to limit new education loans to those backed by government guarantee. In September 2009, management made the decision to discontinue the education lending business and to focus on the growing demand from schools for integrated, simplified billing, payment and cash management solutions. The Consumer Finance line of business continues to service existing loans in these portfolios and will continue to originate education loans through December 4, 2009. These actions are consistent with Key's strategy of de-emphasizing nonrelationship or out-of-footprint businesses.
Cleveland-based KeyCorp is one of the nation's largest bank-based financial services companies, with assets of $97.0 billion at September 30, 2009. Key companies provide investment management, retail and commercial banking, consumer finance, and investment banking products and services to individuals and companies throughout the United States and, for certain businesses, internationally. The company's businesses deliver their products and services through 1,003 branches and additional offices; a network of 1,492 ATMs; telephone banking centers (1.800.KEY2YOU); and a Web site, https://www.key.com/, that provides account access and financial products 24 hours a day.
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 21, 2009. An audio replay of the call will be available through October 28.
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 may cause actual results to differ materially include, among other things: (1) adverse capital market conditions and the ability to raise equity and other funding required by the banking regulators or otherwise; (2) further downgrades in Key's credit ratings; (3) unprecedented volatility in the stock markets, public debt markets and other capital markets, including continued disruption in the fixed income markets; (4) changes in interest rates; (5) changes in trade, monetary or fiscal policy; (6) changes in foreign exchange rates, equity markets and the financial soundness of other unrelated financial companies; (7) asset price deterioration, which has had (and may continue to have) a negative effect on the valuation of certain asset categories represented on Key's balance sheet; (8) continuation of the recent deterioration in general economic conditions, or in the condition of the local economies or industries in which Key has significant operations or assets, which could, among other things, materially impact credit quality trends and Key's ability to generate loans; (9) continued disruption in the housing markets and related conditions in the financial markets; (10) increased competitive pressure among financial services companies due to the consolidation of competing financial institutions and the conversion of certain investment banks to bank holding companies; (11) heightened legal standards and regulatory practices, requirements or expectations; (12) the inability to successfully execute strategic initiatives designed to grow revenues and/or manage expenses; (13) increased FDIC deposit insurance premiums and debt-guarantee fees; (14) difficulty in attracting and/or retaining executives and/or relationship managers; (15) consummation of significant business combinations or divestitures; (16) operational or risk management failures due to technological or other factors; (17) changes in accounting or tax practices or requirements; (18) new legal obligations or liabilities or unfavorable resolution of litigation; and (19) disruption in the economy and general business climate as a result of terrorist activities or military actions.
For additional information on KeyCorp and the factors that could cause actual results or financial condition to differ materially from those described in the forward-looking statements consult KeyCorp's Annual Report on Form 10-K for the year ended December 31, 2008, and subsequent filings with the Securities and Exchange Commission available 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 assume any obligation to update these forward-looking statements.
Financial Highlights
(dollars in millions, except per share amounts)
Three months ended
------------------
9-30-09 6-30-09 9-30-08
------- ------- -------
Summary of operations
Net interest income (TE) $599 $575 $684
Noninterest income 382 706 390
--- --- ---
Total revenue (TE) 981 1,281 1,074
Provision for loan losses 733 823 336
Noninterest expense 901 855 740
Income (loss) from continuing
operations attributable to Key (381) (230) 3
Income (loss) from discontinued
operations, net of taxes (b) (16) 4 (39)
Net loss attributable to Key (397)(a) (226) (36)(a)
Loss from continuing operations
attributable to Key common
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-0.31- KeyBanc
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