KeyCorp Reports Third Quarter 2015 Net Income Of $216 Million, Or $.26 Per Common Share

CLEVELAND, Oct. 15, 2015 /PRNewswire/ -- KeyCorp (NYSE: KEY) today announced third quarter net income from continuing operations attributable to Key common shareholders of $216 million, or $.26 per common share, compared to $230 million, or $.27 per common share, for the second quarter of 2015, and $197 million, or $.23 per common share, for the third quarter of 2014. During the third quarter of 2015, Key incurred $19 million, or $.01 per common share, of costs related to a pension settlement charge, compared to $20 million, or $.01 per common share, during the third quarter of 2014.

For the nine months ended September 30, 2015, net income from continuing operations attributable to Key common shareholders was $668 million, or $.78 per common share, compared to $671 million, or $.76 per common share, for the same period one year ago.

"Key's third quarter results reflect our continued success in growing our business, managing expenses and maintaining strong credit quality," said Chairman and Chief Executive Officer Beth Mooney.

"We generated positive operating leverage relative to the same period last year, driven by a 7% increase in revenue along with well-managed expenses. Revenue trends reflect growth in new and expanded relationships across our company, which drove higher net interest income, as well as continued momentum in our fee-based businesses," continued Mooney. "We saw good loan growth again this quarter, with average balances up 6% from the prior year, driven by a 15% increase in commercial, financial and agricultural loans. Loan balances increased in both the Community Bank and Corporate Bank."

"Results compared with the prior quarter reflect higher net interest income and variability in capital markets revenues, which declined relative to our record second quarter," said Mooney. "Expenses, excluding the pension settlement charge, were lower than the previous quarter."

"Additionally, credit quality remains strong, with net charge-offs to average loans of .27%, which is below our targeted range," added Mooney.

THIRD QUARTER 2015 FINANCIAL RESULTS, from continuing operations

Compared to Third Quarter of 2014

• Average loans up 6%, driven by 15% growth in commercial, financial and agricultural loans
• Average deposits, excluding deposits in foreign office, up 3% due to continued growth in commercial mortgage servicing and inflows from commercial and consumer clients
• Net interest income (taxable-equivalent) up $17 million, as higher earning asset balances offset lower earning asset yields
• Noninterest income up $53 million due to strength in Key's core fee-based businesses, which included a full-quarter impact of the September 2014 Pacific Crest Securities acquisition
• Noninterest expense up $18 million primarily attributable to higher performance-based compensation and a full-quarter impact of the September 2014 Pacific Crest Securities acquisition
• Asset quality remained strong, with net loan charge-offs to average loans of .27%
• Disciplined capital management, repurchasing $123 million of common shares during the third quarter of 2015 and maintaining a solid capital position with an estimated Common Equity Tier 1 ratio of 10.51%

Compared to Second Quarter of 2015

• Average loans up 2%, primarily driven by a 5% increase in commercial, financial and agricultural loans
• Average deposits, excluding deposits in foreign office, down slightly reflecting a decline in short-term noninterest-bearing deposit balances from commercial clients and lower certificates of deposit
• Net interest income (taxable-equivalent) up $7 million attributable to improvement in the earning asset mix, partly offset by slightly lower earning asset yields and loan fees
• Noninterest income down $18 million, primarily due to lower investment banking and debt placement fees partially offset by growth in other fee-based businesses
• Noninterest expense up $13 million, driven by a $19 million pension settlement charge in the third quarter
• Strong asset quality, with net loan charge-offs to average loans remaining below our targeted range of 40-60 basis points

 

Taxable-equivalent net interest income was $598 million for the third quarter of 2015, and the net interest margin was 2.87%.  These results compare to taxable-equivalent net interest income of $581 million and a net interest margin of 2.96% for the third quarter of 2014.  The increase in net interest income reflects higher earning asset balances moderated by lower earning asset yields, which also drove the decline in the net interest margin.

Compared to the second quarter of 2015, taxable-equivalent net interest income increased by $7 million, and the net interest margin was essentially unchanged. The increase in net interest income and the relatively stable net interest margin were primarily attributable to improvement in the earning asset mix, partly offset by slightly lower earning asset yields and loan fees.  One additional day in the third quarter of 2015 also contributed to the increase in net interest income compared to the prior quarter.

Key's noninterest income was $470 million for the third quarter of 2015, compared to $417 million for the year-ago quarter.  The increase from the prior year was primarily attributable to strength in Key's core fee-based businesses, which included a full-quarter impact of the September 2014 acquisition of Pacific Crest Securities. The third quarter of 2015 included $21 million of higher investment banking and debt placement fees, $15 million of increased corporate services income, and $9 million of higher trust and investment services income. Additionally, cards and payments income increased $5 million due to higher revenue from credit card and merchant fees.

Compared to the second quarter of 2015, noninterest income decreased by $18 million.  The primary cause for the decline was $32 million in lower investment banking and debt placement fees, reflecting the variability of the business. Additionally, operating lease income and other leasing gains decreased $9 million. These decreases were partially offset by $14 million in higher corporate services income due to increased derivative income and loan commitment fees, a $6 million increase in other income and $5 million of higher service charges on deposit accounts.

Key's noninterest expense was $724 million for the third quarter of 2015, compared to $706 million in the third quarter of last year. Personnel costs increased $21 million year-over-year primarily due to increased performance-based compensation related to a strong capital markets business performance, along with a full-quarter impact of the September 2014 acquisition of Pacific Crest Securities. Nonpersonnel expense remained relatively stable as lower occupancy costs offset an increase in business services and professional fees. 

Compared to the second quarter of 2015, noninterest expense increased by $13 million. This increase was primarily driven by a pension settlement charge of $19 million and partially offset by $5 million in lower nonpersonnel expense, largely related to lower occupancy costs.

BALANCE SHEET HIGHLIGHTS

In the third quarter of 2015, Key had average assets of $94.8 billion compared to $91.3 billion in the third quarter of 2014 and $93.9 billion in the second quarter of 2015. 

Average loans were $59.3 billion for the third quarter of 2015, an increase of $3.5 billion compared to the third quarter of 2014.  The loan growth occurred primarily in the commercial, financial and agricultural portfolio, which increased $3.9 billion and was broad-based across Key's commercial lines of business. Consumer loans declined $214 million as a result of the run-off in Key's consumer exit portfolios.  Key's core consumer loan portfolio remained relatively stable to the year-ago quarter.

Compared to the second quarter of 2015, average loans increased by $1.3 billion, driven by commercial, financial and agricultural loans, which grew $1.8 billion on a period-end basis.

Average deposits, excluding deposits in foreign office, totaled $70 billion for the third quarter of 2015, an increase of $2.2 billion compared to the year-ago quarter.  NOW and money market deposit accounts increased by $2.3 billion, and noninterest-bearing deposits increased by $966 million, reflecting continued growth in the commercial mortgage servicing business and inflows from commercial and consumer clients. These increases were partially offset by a decline in certificates of deposit.

Compared to the second quarter of 2015, average deposits, excluding deposits in foreign office, decreased by $278 million. The decrease was driven by a decline in short-term noninterest-bearing deposit balances from commercial clients and lower certificates of deposit.  These decreases were partly offset by increases in NOW and money market deposit accounts.

Key's provision for credit losses was $45 million for the third quarter of 2015, compared to $19 million for the third quarter of 2014 and $41 million for the second quarter of 2015.  Key's allowance for loan and lease losses was $790 million, or 1.31% of total period-end loans, at September 30, 2015, compared to 1.43% at September 30, 2014, and 1.37% at June 30, 2015. 

Net loan charge-offs for the third quarter of 2015 totaled $41 million, or .27% of average total loans.  These results compare to $31 million, or .22%, for the third quarter of 2014, and $36 million, or .25%, for the second quarter of 2015.  

At September 30, 2015, Key's nonperforming loans totaled $400 million and represented .67% of period-end portfolio loans, compared to .71% at September 30, 2014, and .72% at June 30, 2015.  Nonperforming assets at September 30, 2015 totaled $417 million and represented .69% of period-end portfolio loans and OREO and other nonperforming assets, compared to .74% at September 30, 2014, and .75% at June 30, 2015.  

CAPITAL

Key's estimated risk-based capital ratios included in the following table continued to exceed all "well-capitalized" regulatory benchmarks at September 30, 2015.

As shown in the preceding table, at September 30, 2015, Key's estimated Common Equity Tier 1 and Tier 1 risk-based capital ratios stood at 10.51% and 10.90%, respectively.  In addition, the tangible common equity ratio was 9.90% at September 30, 2015.

In October 2013, federal banking regulators published the final Basel III capital framework for U.S. banking organizations (the "Regulatory Capital Rules").  The mandatory compliance date for Key as a "standardized approach" banking organization began on January 1, 2015, subject to transitional provisions extending to January 1, 2019.  Key's estimated Common Equity Tier 1 ratio as calculated under the fully phased-in Regulatory Capital Rules was 10.41% at September 30, 2015.  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 2015 capital plan includes common share repurchases of up to $725 million, which are expected to be executed through the second quarter of 2016. During the third quarter of 2015, Key completed $123 million of common share repurchases, including repurchases to offset issuances of common shares under employee compensation plans.

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. 

In the third quarter of 2015, Key enhanced the approach used to determine the commercial reserve factors used in estimating the quantitative component of the commercial allowance for loan and lease losses. In addition, Key began utilizing an enhanced framework to quantify commercial allowance for loan and lease loss adjustments resulting from qualitative factors not fully captured within the statistical analysis of expected loss. The impact of these changes was largely neutral to the total allowance for loan and lease losses at September 30, 2015. However, because the quantitative reserve is allocated to the business segments at a loan level, while the qualitative portion is allocated at the portfolio level, the impact of the methodology enhancements on the allowance for each business segment and each portfolio caused the business segment and commercial portfolio reserves to increase or decrease accordingly. While the impact of the increases and decreases on the business segment and commercial portfolio reserves was not significant, the current quarter provision for credit losses within each business segment is not comparable to prior period amounts as a result of these methodology enhancements.

Key Community Bank Summary of Operations

• Positive operating leverage from prior year
• Net income increased to $71 million, up 18.3% from prior year
• Commercial, financial and agricultural loan growth of $1 billion, or 8.7% from prior year
• Average deposits up $931 million, or 1.9% from the prior year

Key Community Bank recorded net income attributable to Key of $71 million for the third quarter of 2015, compared to net income attributable to Key of $60 million for the year-ago quarter.

Taxable-equivalent net interest income increased by $20 million, or 5.6%, from the third quarter of 2014 due to an increase in average loans and leases of 3.1%, including commercial, financial and agricultural loans, which grew by $1 billion, or 8.7%, from the prior year. Average deposits increased 1.9% from one year ago. 

Noninterest income remained relatively stable from the year-ago quarter.  Core revenue continues to improve, driven by growth in cards and payments income of $4 million, mostly offset by lower service charges on deposit accounts and a decrease in other income.

The provision for credit losses decreased by $3 million, or 14.3%, from the third quarter of 2014, due to the enhancements to the approach utilized to determine the allowance for loan and lease losses discussed above.

Noninterest expense increased by $7 million, or 1.6%, from the year-ago quarter. Personnel expense increased $1 million while nonpersonnel expense increased by $6 million.

Key Corporate Bank Summary of Operations

• Investment banking and debt placement fees up 25.6% from the prior year
• Revenue up 13.5% from the prior year
• Average loan and lease balances up 13.8% from the prior year

Key Corporate Bank recorded net income attributable to Key of $138 million for the third quarter of 2015, an increase of $4 million, or 3%, from the same period one year ago.

Taxable-equivalent net interest income increased by $5 million, or 2.3%, compared to the third quarter of 2014.  Average earning assets increased $3 billion, or 12.2%, from the year-ago quarter, primarily driven by growth in commercial, financial and agricultural loans. Average deposit balances increased $1.2 billion, or 6.9%, from the year-ago quarter, driven by commercial mortgage servicing deposits and other commercial client inflows. 

Noninterest income was up $49 million, or 26.5% from the prior year.  Investment banking and debt placement fees increased $22 million, or 25.6%, driven by strength in syndications, debt underwriting, and financial advisory fees.  Corporate services income increased $16 million, or 53.3%, due to higher derivatives income and loan commitment fees.  Trust and investment services income increased $9 million, or 34.6%, primarily due to the September 2014 acquisition of Pacific Crest Securities.     

The provision for credit losses increased $28 million from the same period one year ago, primarily due to the enhancements to the approach utilized to determine the allowance for loan and lease losses discussed above, as well as a 13.8% increase in average loan balances.

Noninterest expense increased by $33 million, or 15.5%, from the third quarter of 2014.  This increase was driven primarily by higher personnel expense, from increased performance-based compensation related to a strong capital markets business performance, along with a full quarter impact of the September 2014 acquisition of Pacific Crest Securities.

Other Segments

Other Segments consist of Corporate Treasury, Key's Principal Investing unit and various exit portfolios.  Other Segments generated net income attributable to Key of $26 million for the third quarter of 2015, essentially unchanged compared to net income attributable to Key of $27 million for the same period last year. 

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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 $95.4 billion at September 30, 2015.

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.

Notes to Editors:A live Internet broadcast of KeyCorp's conference call to discuss quarterly results and currently anticipated earnings trends and to answer analysts' questions can be accessed through the Investor Relations section at https://www.key.com/ir at 9:00 a.m. ET, on Thursday, October 15, 2015.  An audio replay of the call will be available through October 22, 2015.

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SOURCE KeyCorp